Question

ABC Corp. has a market capitalization of $300 million and a beta of 0.75. It has $75 million in outstanding debt and its debt beta is 0.20. The risk-free rate is 3% and the market risk-premium is 5%.

Required:
Calculate ABCâs unlevered cost of capital.

Answer 1

6.20000%

Step-by-step explanation:

The computation of the unlevered cost of capital is shown below;

Asset beta is

= (Debt × Debt beta + Equity × Equity beta) ÷ (Debt + Equity)

= (75 × 0.20 + 300 × 0.75) ÷ (75 + 300)

= 0.6400000

Now

Unlevered cost of capital is

= risk free rate + asset beta × market risk premium

= 3% + 0.6400000 × 5%

= 6.20000%