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Unlevered Cost of Equity Formula:
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The unlevered cost of equity represents the theoretical cost of equity for a company without any debt. It measures the expected rate of return that equity investors would require if the company had no financial leverage.
The calculator uses the Capital Asset Pricing Model (CAPM) formula:
Where:
Explanation: The formula calculates the required return on equity by adding a risk premium (based on the asset's systematic risk) to the risk-free rate.
Details: The unlevered cost of equity is crucial for capital budgeting decisions, company valuation, and comparing investment opportunities across companies with different capital structures.
Tips: Enter the risk-free rate (typically government bond yield), unlevered beta (measure of systematic risk), and expected market return. All values must be non-negative percentages except beta which is unitless.
Q1: What's the difference between levered and unlevered cost of equity?
A: Levered cost of equity includes the effect of debt financing, while unlevered cost of equity represents the cost for a debt-free company.
Q2: How do I determine the appropriate risk-free rate?
A: Use the yield on long-term government bonds (10-year or 30-year) that match your investment horizon.
Q3: What is unlevered beta and how is it different from levered beta?
A: Unlevered beta measures only business risk, while levered beta includes both business and financial risk.
Q4: When should I use unlevered vs levered cost of equity?
A: Use unlevered cost of equity for capital budgeting and comparing companies with different debt levels. Use levered cost of equity for evaluating returns to equity investors.
Q5: What are typical values for unlevered cost of equity?
A: Typically ranges from 6% to 12%, depending on the industry, economic conditions, and company-specific risk factors.