T-bill return is 3.7 % annually. The expected annual return on the market portfolio equals 12 %.
Question:
T-bill return is 3.7 % 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 .80 which is its current level. Gamma Corporation has debt in the form of corporate bonds. The bonds mature in 21 years, each bond has a $1,000 par value, and the coupon rate of 6.6 %. The bonds require that the coupons are made semiannually until the bonds mature. Each bond can be traded for $1,080 in today's economy. Gamma Corporation faces a 24 % tax rate on its taxable income. |
a. | Gamma Corporation's cost of debt (HINT: "annual yield to maturity"!) is ____: (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
b. | Gamma Corporation's cost of equity is ____: (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
c. | Gamma Corporation's WACC is _____ (TIP: if you are unsure how to use the information on "debt-to-equity ratio" to calculate "weight of debt" and "weight of equity", you can watch my short video https://youtu.be/BAipMtb6N9k) : (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
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Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill