Donner Metals has a cost of equity of 14.1 percent and a pretax cost of debt of 7.82 percent. The debt-equity ratio is 1.40 and the tax rate is 25 percent. What is the unlevered cost of capital?
10.68% |
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10.88% |
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11.04% |
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11.27% |
||
11.43% |
Cost of levered equity = Cost of unlevered equity + (Cost of unlevered equity - cost of debt)(1 - tax)debt-debt ratio
0.141 = Cost of unlevered equity + (Cost of unlevered equity - 0.0782)(1 - 0.25)1.4
0.141 = Cost of unlevered equity + (Cost of unlevered equity - 0.0782)1.05
0.141 = Cost of unlevered equity + 1.05Cost of unlevered equity - 0.08211
0.22311 = 2.05Cost of unlevered equity
Cost of unlevered equity = 0.1088 or 10.88%
Donner Metals has a cost of equity of 14.1 percent and a pretax cost of debt...
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