Final answer:
To estimate the equity cost of capital, one would use the CAPM formula, adjusting for the company's specific debt-to-equity ratio and the cost of debt. Without concrete tax rates and debt costs, a precise numerical estimation is not feasible.
Step-by-step explanation:
To estimate the equity cost of capital for a firm with a risk-free rate of 5.6%, market return of 15%, and a debt-to-equity ratio of 1 to 1, we need to adjust the formula for the Capital Asset Pricing Model (CAPM). The calculation would involve using the risk-free rate, the market return, and the company's equity market-beta after adjusting for the effects of financial leverage.
The formula for the cost of equity using the CAPM is:
Cost of Equity = Risk-Free Rate + Beta x (Market Return - Risk-Free Rate)
Additionally, to reflect the debt in the company's structure, the Modigliani-Miller Proposition with taxes could be used to account for the effects of leverage on the cost of equity. Since the firm has a higher debt ratio and a beta of 0.2 for debt, our estimation would predictably be higher than that of the unleveraged or lower-leveraged firm. However, without specific details on tax rates and the company's expected return on debt, we can't give a numerical estimate for the finance question you are asking.