Rosita's has a cost of equity of 13.76 percent and a pretax cost of debt of 8.5 percent.The debt-equity ratio is .60 and the tax rate is 21 percent.What is Rosita's unlevered cost of capital?
A)11.83 percent
B)12.07 percent
C)13.97 percent
D)14.08 percent
E)14.60 percent

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 * 13.76% + 0.375 * 8.5% * (1 - 0.21) = 12.07%.

Rosita's Has a Cost of Equity of 13