Alabaster Incorporated has an equity cost of capital of 14%. The debt to value ratio is .6,the tax rate is 35%,and the cost of debt is 8%. What is the cost of equity if Alabaster was unlevered?

Question

Quizplus · Accepted Answer

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

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

Plugging in the given values, we get:

Unlevered Cost of Equity = 0.14 / (1 + (1 - 0.35) x (0.6)) 
Unlevered Cost of Equity = 0.1103 or 11.03%

Therefore, the correct answer is option C.

Alabaster Incorporated Has an Equity Cost of Capital of 14