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Southwest Airlines is an all-equity firm, with a perpetual EBIT of $153.85. The firm is...

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Finance

Southwest Airlines is an all-equity firm, with a perpetual EBIT of $153.85. The firm is considering to issue $200 worth of debt with an interest rate of 10% and use the proceeds to buyback its shares. The tax rate is 35%.

Assume the firm has a current required return of 20% and all earnings are returned to shareholders as dividends after taxes.

What will the value of the airlines be after the debt issuance?

What is Southwest Airlines cost of equity after debt

issuance?

Is Southwest Airlines overall cost of capital higher or lower

after the debt issuance?

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