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.)

please show formulas how to solve

Answer rating: 100% (QA)

SOLUTION a The cost of debt for Gamma Corporation can be calculated as the yield to maturity YTM of the corporate bonds The bonds have a coupon rate o... View the full answer