Question

Your firm is financed​ 100% with equity and has a cost of equity capital of

13%.

You are considering your first debt​ issue, which would change your capital structure to

34​%

debt and

66​%

equity. If your cost of debt is

6%,

what will be your new cost of​ equity? Assume no change in your​ firm's WACC due to the change in capital structures.

Answer 1

Levered cost of equity = Unlevered cost of equity+D/E*( Unlevered cost of equity-cost of debt)*(1-tax rate)

Levered cost of equity = 13+0.515151515151515*(13-6)*(1-0)

Levered cost of equity = 16.61