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Frankenstein Bicycles has an unlevered cost of equity of 0.21. Their bonds are worth 472,341 and...
Frankenstein Bicycles has an unlevered cost of equity of 0.21. Their bonds are worth 472,341 and their equity is worth 446,790. The debt rate is 0.02 and their tax rate is 0.40. What is Frankenstein's cost of levered equity?
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Expert Solution
The unlevered cost of equity is 0.21(given)
This means if the proxy firm had been unlevered, its Beta would have been 0.21 reflecting pure business risk of the company.
The formula for levered beta is
Beta levered = Beta unlevered [1+debt/equity (1-tax)]
=0.21[1+0.02(1-0.40)]
=0.21*1.0120
=.2125
jeff jeffy answered 2 years agoRelated Solutions
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