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MakcuM [25]
2 years ago
7

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 be

ta is 0.20. The risk-free rate is 3% and the market risk-premium is 5%.
Required:
Calculate ABCâs unlevered cost of capital.
Business
1 answer:
Vesna [10]2 years ago
7 0

Answer:

6.20000%

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%

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