Rosita's has a cost of equity of 13.8% and a pre-tax cost of debt of 8.5%. The debt-equity ratio is .60 and the tax rate is .34. What is Rosita's unlevered cost of capital?
A) 8.83%
B) 12.30%
C) 13.97%
D) 14.08%
E) 14.60%

Question

Quizplus · Accepted Answer

The unlevered cost of capital can be calculated using the formula: Unlevered Cost of Capital = (E/V) * Cost of Equity + (D/V) * Cost of Debt * (1 - Tax Rate). Here, E/V = 1/(1+0.6) = 0.625 and D/V = 0.6/(1+0.6) = 0.375. Plugging in the values: Unlevered Cost of Capital = 0.625 * 13.8% + 0.375 * 8.5% * (1 - 0.34) = 12.30%.

Rosita's Has a Cost of Equity of 13