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STM has a levered beta of 2.5. It's market cap is $4 million, and it has...

STM has a levered beta of 2.5. It's market cap is $4 million, and it has 1.5 million in outstanding debt. The risk-free rate is 5% and the market risk premium is 6%. the tax rate is 30%. How much is the un-levered cost of equity?

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Answer #1

Levered Beta = 2.5

Equity (Market Cap) (E) = $4 million

Debt(D) = 1.5 million

Tax rate (t) = 30%

Calculation of Un-levered Beta:

where

Bu = un-levered beta

BL = levered beta

putting the values:

Risk free rate = 5%

Market risk premium = 65

Calculation of un-levered cost of equity (Keu):

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