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The Gamma Corporation is financed 75% with common stock and 25% with debt. The debt currently...

The Gamma Corporation is financed 75% with common stock and 25% with debt. The debt currently has an interest rate, before tax, of 11% per year. Gamma’s common stock trades at $20 per share. The most recent quarterly dividend was $0.60. Future dividends are expected to grow 1.2% per quarter. Gamma’s marginal tax rate is 39%. Find the weighted average cost of capital (WACC).

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Answer #1

Calculating Cost of Equity using DDM Model,

r = 0.60(1.02)/20 + 0.012

r = 4.26%

WACC = 0.25(0.11)(1 - 0.39) + 0.75(0.0426)

WACC = 4.87%

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