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Homework answers / question archive / Super Co, is currently keeping a constant debt-to-equity policy with a debt-to value ratio of 30%
Super Co, is currently keeping a constant debt-to-equity policy with a debt-to value ratio of 30%. The after-tax unlevered cashflow is 35,000,000 a year in perpetuity and the unlevered value of assets is 545,000,000. The cost of debt is 4.45% and the tax rate is 34%. What is the levered return on equity?
unlevered return on equity=after tax unlevered cash flow/unlevered value of assets=35000000/545000000=6.4220%
levered return on equity=cost of unlevered equity+(cost of unlevered equity-cost of debt)*Debt/Value*1/(1-Debt/value)*(1-tax rate)=6.4220%+(6.4220%-4.45%)*30%/(1-30%)*(1-34%)=6.9798%
