Gamma Airlines has an asset beta of 1 5 The risk free interest rate is 6 , and the market risk premium is 8 Assume the capital asset pricing model is correct Gamma pays taxes at a marginal rate of 35 Draw a graph plotting Gammas cost of equity and after tax WACC as a function of its debt to equity ...

We make use of the basic relationship Since overall beta b A is not affected by capital struc ...

Gamma Airlines has an asset beta of 1.5. The risk-free interest rate is 6%, and the market

Question:

Gamma Airlines has an asset beta of 1.5. The risk-free interest rate is 6%, and the market risk premium is 8%. Assume the is correct. Gamma pays taxes at a marginal rate of 35%. Draw a graph plotting Gamma’s and after-tax WACC as a function of its debt-to-equity ratio D/E, from no debt to D/E = 1.0. Assume that Gamma’s debt is risk-free up to D/E = .25. Then the interest rate increases to 6.5% at D/E = .5, 7% at D/E = .8, and 8% at D/E = 1.0. As in Problem 21, you can assume that the firm’s overall beta (βA) is not affected by its or the taxes saved because debt interest is tax-deductible.

Capital Asset Pricing Model
The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected return for assets, particularly stocks. The CAPM is a model for pricing an individual security or portfolio. For individual securities, we make use of the security market line (SML) and its... Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a... Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the...