Required

Calculate Gamma Corporation's cost of debt

Calculate Gamma Corporation's cost of equity 

Calculate Gamma Corporation's WACC

Transcribed Image Text:

GIVEN ABOUT THE MARKET: • T-bill return is 3.1% annually. • The expected annual return on the market portfolio equals 12 %. GIVEN ABOUT THE "GAMMA CORPORATION": • Gamma Corporation's capital structure is levered. (If Gamma Corporation was not levered, its equity Beta would have been .95.) • Gamma Corporation would like to maintain a target debt-to-equity ratio of .50 which is its current level. • Gamma Corporation has debt in the form of corporate bonds. The bonds mature in 25 years, each bond has a $1,000 par value, and the coupon rate of 6 %. The bonds require that the coupons are made semiannually until the bonds mature. Each bond can be traded for $1,050 in today's economy. • Gamma Corporation faces a 23 % tax rate on its taxable income. GIVEN ABOUT THE MARKET: • T-bill return is 3.1% annually. • The expected annual return on the market portfolio equals 12 %. GIVEN ABOUT THE "GAMMA CORPORATION": • Gamma Corporation's capital structure is levered. (If Gamma Corporation was not levered, its equity Beta would have been .95.) • Gamma Corporation would like to maintain a target debt-to-equity ratio of .50 which is its current level. • Gamma Corporation has debt in the form of corporate bonds. The bonds mature in 25 years, each bond has a $1,000 par value, and the coupon rate of 6 %. The bonds require that the coupons are made semiannually until the bonds mature. Each bond can be traded for $1,050 in today's economy. • Gamma Corporation faces a 23 % tax rate on its taxable income.

Answer rating: 100% (QA)

To calculate Gamma Corporations cost of debt we can use the following formula Cost of debt coupon ra... View the full answer