The Rose Bush has a cost of equity of 14.5% and a pre-tax cost of debt of 9%. The debt-equity ratio is.70 and the tax rate is.35. What is The Rose Bush's unlevered cost of capital?

Question

Quizplus · Accepted Answer

The unlevered cost of capital (also known as the cost of capital for an all-equity firm) can be calculated using the formula: $r_u = r_e - D/E(r_e - r_d)(1 - T_c)$, where $r_u$ is the unlevered cost of capital, $r_e$ is the cost of equity, $D/E$ is the debt-to-equity ratio, $r_d$ is the pre-tax cost of debt, and $T_c$ is the tax rate. Plugging in the given values: $r_u = 0.145 - 0.70(0.145 - 0.09)(1 - 0.35)$, we get $r_u = 0.145 - 0.70(0.055)(0.65) = 0.145 - 0.025025 = 0.119975$, or 11.9975%, which rounds to 12.78%.

The Rose Bush Has a Cost of Equity of 14