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Please assume that you have an airline carrier firm, and you are evaluating a privately held takeover target. The table below contains cost of capital metrics for four comparable airline carriers, that are in the same general business and are similar in size compared to the acquisition target.

Company Name	Levered Equity Beta	Debt/Equity	Assumed Debt Beta
ABC Airlines	1.01	0.26	0.30
Kappa G. Airlines	0.96	0.22	0.30
Safe Blue	0.73	0.38	0.30
Starshine Airlines	0.97	0.06	0.30

You decide to equally weight all the company data to estimate the correct discount rate to use in valuing the target. The target will be financed with 25% debt, with a pretax cost of debt equal to 5%. Assume that all of the firms in your analysis are in the 30% tax bracket and that all of the firms have a policy to leave their debt ratio constant. Answer the following questions regarding the correct cost of capital to use in valuing the target. For all parts of this problem, assume a long-term US Treasury bond yield of 3.5 % and an estimated market risk premium of 5.5%.

a. What is the estimated asset (unlevered equity) beta for the target firm based on the company data?

b. What is the estimated levered beta for the target based on the company data and the targets debt/equity ratio of 25%?

Hints! Use simple average of unlevered equity betas and the debt beta of 0.3

c. Calculate the cost of equity.

d. Using the cost of equity already calculated and the information on the cost of debt in the problem, what is the WACC to use in discounting the targets projected firm free cash flows?

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