Question

Suppose you borrow $7,936.22 when financing a gym valued at $37,423.48. Assume that the unlevered cost of the gym is 17.56% and that the cost of debt is valued at 6.71%. What should be the cost of equity of your firm?

Answer 1

Calculation of the cost of equity of the firm, will be equal to levered cost of equity:

Formula:

Levered cost of equity = Unlevered cost of equity + D/E x (Unlevered cost - Cost of Debt)

= 17.56% + $7936.22 / $37,423.48 x (17.56% -6.71%)

= 17.56% + 0.212065 x 10.85%

= 17.56% + 2.30%

= 19.86% (Answer)