Question

Elliott's Cross Country Transportation Services has a capital structure with 25% debt at an 8% interest rate. Its beta is 1.4, the risk-free rate is 4%, and the market risk premium is 6%. Elliott's combined federal-plus-state tax rate is 25%. What is Elliott's cost of equity? Do not round intermediate calculations. Round your answer to two decimal places. What is its weighted average cost of capital? Do not round intermediate calculations. Round your answer to two decimal places. What is its unlevered cost of equity? Do not round intermediate calculations. Round your answer to two decimal places.

I found cost of equity is 12.40% and WACC is 10.80%. I am having difficulty finding the unlevered cost of equity.

Answer 1

Cost of Equity = 12.40%

WACC = 10.80%

Debt Equity = 25% / 75%

= 0.33333333333

Unlevered Beta = Levered Beta (1 + (1 - Taxrate) * Debit

1.4 (1 + (1 – 0.25) * 0.33333333333

= 1.4 / 1.25

= 1.12

Unlevered Beta = 1.12

Unlevered Cost of Equity =
Ry + betal Rm-R)

= 4% + 1.12 (6%)

= 10.72%

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