The unlevered cost of capital is _________________.
A) The cost of capital for a ﬁrm with no equity in its capital structure.
B) The cost of capital for a ﬁrm with no debt in its capital structure.
C) The interest tax shield times pretax net income.
D) The cost of preferred stock for a ﬁrm with equal parts debt and common stock in its capital structure.
E) Equal to the proﬁt margin for a ﬁrm with some debt in its capital structure.

Question

Quizplus · Accepted Answer

The unlevered cost of capital is the cost of capital for a firm with no debt in its capital structure. It represents the minimum return that a company needs in order to satisfy both its lenders and investors. Since there is no debt, there is no interest expense to deduct from the earnings before interest and taxes (EBIT), which is the numerator of the cost of capital equation. Therefore, the unlevered cost of capital is simply the cost of equity, or the required return on the company's assets without considering the effects of leverage.

The Unlevered Cost of Capital Is _________________