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You are tasked with estimating the cost of capital for a firm. The risk-free rate is...

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Finance

You are tasked with estimating the cost of capital for a firm.The risk-free rate is 3.2%, the expected rate of return on themarket is 17.9%. Now, another similar company (similar unleveredcost of capital) has a debt-to-equity ratio of 1 to 5. It has adebt beta near zero and an equity market-beta of 1.1. Your own firmhas more debt, for a debt-to-equity ratio of 1 to 1, with a debtbeta of 0.5. What is a good estimate for your equity cost ofcapital?

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The relationship between asset unlevered beta debt beta equity beta is given by the following formulaLet us    See Answer
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You are tasked with estimating the cost of capital for a firm.The risk-free rate is 3.2%, the expected rate of return on themarket is 17.9%. Now, another similar company (similar unleveredcost of capital) has a debt-to-equity ratio of 1 to 5. It has adebt beta near zero and an equity market-beta of 1.1. Your own firmhas more debt, for a debt-to-equity ratio of 1 to 1, with a debtbeta of 0.5. What is a good estimate for your equity cost ofcapital?

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