Airbus Is Intending To Buy Machinery To Build Aeroplane Wings For The A380 Plane Financed With Debt Costing 10%

Question

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 Finance