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Leverage and cost of capital Gamma Airlines has an asset beta of 1.5. The risk-free interest rate is r f = 6%, and the market

Leverage and cost of capital

Gamma Airlines has an asset beta of 1.5. The risk-free interest rate is rf = 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%. How does WACC chagnes with difference D/E ratio ? Draw a graph. Assume that Gammas debt is risk-free to begin with but then rises to 6.5% at D/E = 0.5, 7% at D/E = 0.8% and 8% at D/E=1.

Please show all calculations

You can see D/E ratio numbers in the last sentence. And the Beta is 1.5 to begin with

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