Hilltop Paving has a levered equity cost of capital of 14.92 percent.The debt-to-value ratio is .4,the assumed tax rate is 23 percent,and the pretax cost of debt is 7.2 percent.What is the estimated unlevered cost of equity?

Question

Quizplus · Accepted Answer

The unlevered cost of equity can be calculated using the formula: 
Unlevered Cost of Equity = Levered Cost of Equity / (1 + (1 - Tax Rate) x (Debt-to-Equity Ratio))
= 14.92% / (1 + (1 - 0.23) x 0.4)
= 12.30%
Therefore, the estimated unlevered cost of equity is 12.30%, which is closest to option C (12.30%).

Hilltop Paving Has a Levered Equity Cost of Capital of 14.92