Question

Williamson, Inc. has a debt-equity ratio of 2.5. The firm’s weighted average cost of capital is 10% and its pre-tax cost of debt is 6%. Williamson faces a corporate tax rate of 35%. b) (1) What is Williamson’s unlevered cost of equity capital?

Answer 1

Williamson's unlevered cost of equity capital is approximately 9.53%.

Step-by-step explanation:

To calculate Williamson's unlevered cost of equity capital, we need to use the formula:

Unlevered Cost of Equity = Cost of Capital - ((Debt/Equity) x (1 - Tax Rate))

Given that Williamson has a debt-equity ratio of 2.5, and a pre-tax cost of debt of 6%, we can substitute the values into the formula:

Unlevered Cost of Equity = 10% - ((2.5/(1+2.5)) x (1-0.35))

Simplifying the expression, we get:

Unlevered Cost of Equity = 10% - (2.5/3.5) x 0.65

Unlevered Cost of Equity = 10% - 0.4643

Therefore, Williamson's unlevered cost of equity capital is approximately 9.53%.