A Aircraft company's capital structure is made up of 40% debt and 60% common equity (both at market values). The interest rate on bonds similar to those issued by the company is 8%. The cost of equity is estimated to be 15%. The income tax rate is 40%. The company's weighted cost of capital is

8.9

To calculate the weighted cost of capital (WACC) for the aircraft company, we need to consider the proportion of debt and equity in its capital structure and the respective cost of each component. The formula to calculate WACC is:

WACC = (Proportion of Debt * Cost of Debt) + (Proportion of Equity * Cost of Equity)

Given:
- The capital structure is 40% debt and 60% common equity.
- The interest rate on similar bonds is 8% (cost of debt).
- The cost of equity is estimated to be 15%.
- The income tax rate is 40%.

Step 1: Calculate the cost of debt after tax.
Since interest expense is tax-deductible, the effective cost of debt can be calculated as follows:
Cost of Debt after Tax = Cost of Debt * (1 - Tax Rate)

Cost of Debt after Tax = 8% * (1 - 0.40) = 8% * 0.60 = 4.8%

Step 2: Calculate the WACC.
WACC = (Proportion of Debt * Cost of Debt after Tax) + (Proportion of Equity * Cost of Equity)

WACC = (40% * 4.8%) + (60% * 15%) = 1.92% + 9% = 10.92%

Therefore, the company's weighted cost of capital (WACC) is 10.92%.