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Cost of equity/WACC

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A firm has a debt-to-equity ration of 1. Its (levered) cost of equity is 16% and its cost of debt is 8%. If there were no taxes, What would be its cost of equity if the debt-to-equity ratio were zero?

A company has a debt to total value ratio of 0.5 . The cost of debt is 8% and that of unlevered equity is 12%. Calculate the weighted average cost of capital if the tax rate is 30%.

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Solution Summary

The solution explains the calculation of cost of equity and WACC.

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If debt to equity is zero, the firm is fully equity and so we have to find the unlevered cost of equity. This is calculated as
rs = r0 + B/S (r0-rb) where
rs = levered cost of equity = 16%
r0 = unlevered ...

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