Calculate Ideko\'s unlevered cost of capital when Ideko\'s unlevered beta is 1.2

Question

Calculate Ideko's unlevered cost of capital when Ideko's unlevered beta is 1.23, the risk-free rate of return is 5.05 percent and the expected market risk premium is 5.64 percent. As a reference, the equity betas with confidence intervals along with capital structure and unlevered beta estimates for comparable firms are shown here,

0.40 to 1.00

he estimate of Ideko's unlevered cost of capital is what percent? Round 2 decimal places

Monthly Returns 10-Day Returns Firm Beta 95% C.I. Beta 95% C.I. Oakley 1.99 1.20 to 2.80 1.37 0.90 to 1.90 Luxottica 0.56 0.00 to 1.10 0.86 0.50 to 1.20 Nike 0.48 -0.10 to 1.00    0.69

0.40 to 1.00

Explanation / Answer

The Unlevered cost of capital is equal to the equity becuase there is no debt,

So, unelevered cost of Capital = Cost of equity = risk free return + Unlevered -beta * market risk premium

risk free return = 5.05%, unlevered beta = 1.23 and market risk premium = 5.64%

Unlevered cost of capital = 5.05 + 1.23*5.64 = 11.9872%

Unlevered cost of capital Ideko = 11.9872% = 11.99% (Rounded to 2 decimals)

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