Firm Ys debt consists of BB-rated bonds with a promised yield to maturity of 8.42%, a probability of default of 2.2% and an expected loss in default of 60%. What is the firms debt cost of capital?

You have the following information about the S&P500 index:

• Expected dividend yield for the next year (): 2.7%
• Expected perpetual dividend growth rate: 3.5%.

The S&P500 index is a proxy for the market portfolio, so we assume that the return on the market portfolio is equal to the return on the S&P500.

What is the expected return on the market portfolio implied by the Gordon model?