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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 ago
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