Airbus is intending to buy machinery to build aero-plane wings for the A380 plane financed with debt costing 10%
before tax. Airbus mixes debt and equity in its capital structure. The market return is 15%, the Treasury Bill pays 5% and Airbus has a beta of 1.75. Debt has a 40% weight and common equity has a 60% weight of the firm’s capital structure. Airbus corporate tax rate = 30%.
a) Calculate Airbus weighted average cost of capital showing all your workings.
b) Briefly explain what you would recommend to the management of
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