How Do You Calculate Unlevered Cost Of Equity?
Unlevered (unleveraged) equity refers the stock of a company that is financing operations with all equity and no debt. In this case, the cost of capital is only the cost of equity, as there is no debt to account for. Since debt is more costly for companies to issue than equity, the difference between the cost of capital for a company with unlevered equity and a company with levered equity can be significant. This creates economic advantages for companies that raise capital without tapping into the debt markets. Determine the risk-free rate.This is usually the interest rate on 10-year Treasury bonds. You can look this rate up online or in the investment section of a newspaper. Determine the expected market return. The expected rate of return is the average market return. In general, investors use 10 percent as an average stock market return over 10 years. Determine the cost of equity. The formula for the cost of equity with no debt is: rf + bu (rm – rf), where rf is the risk-free rate,
