The Tip-Top Paving Co. has an equity cost of capital of 16.97%. The debt to value ratio is .6,the tax rate is 34%,and the cost of debt is 11%. What is the cost of equity if Tip-Top was unlevered?

Question

Quizplus · Accepted Answer

To find the unlevered cost of equity, we need to use the following formula:

Unlevered Cost of Equity = Cost of Equity / (1 + (1 - Tax Rate) * Debt/Equity)

Given:

Equity Cost of Capital = 16.97%
Debt/Value ratio = 0.6
Tax rate = 34%
Cost of Debt = 11%

Using the above formula, we can calculate the unlevered cost of equity as follows:

Unlevered Cost of Equity = 16.97% / (1 + (1 - 0.34) * 0.6)
= 14.0%

Therefore, the answer is C) 14.0%.