Unlevered Cost of Capital

The unlevered cost of capital is the cost of capital for a company that has no debt. It is calculated by taking the weighted average cost of capital (WACC) and subtracting the after-tax cost of debt. The WACC is a measure of the cost of capital for a company that has both debt and equity. It is calculated by taking the weighted average of the cost of each type of capital, where the weights are the proportions of each type of capital in the company's capital structure. The after-tax cost of debt is the cost of debt after taking into account the tax savings that a company can realize by issuing debt.

The unlevered cost of capital is used to value companies that do not have any debt. It is also used to compare the values of companies that have different levels of debt. The unlevered cost of capital is a more accurate measure of the cost of capital for a company that is likely to change its capital structure in the future.

The unlevered cost of capital is calculated as follows:

**Unlevered Cost of Capital = WACC - (After-tax Cost of Debt * Debt-to-Equity Ratio)**

where:

* WACC = Weighted Average Cost of Capital
* After-tax Cost of Debt = Cost of Debt * (1 - Tax Rate)
* Debt-to-Equity Ratio = Debt / Equity

The WACC is calculated as follows:

**WACC = (Cost of Equity * Equity Weight) + (Cost of Debt * Debt Weight)**

where:

* Cost of Equity = Cost of Equity
* Equity Weight = Equity / (Equity + Debt)
* Cost of Debt = Cost of Debt
* Debt Weight = Debt / (Equity + Debt)

The cost of equity is the return that investors require on their investment in a company's stock. The cost of debt is the interest rate that a company pays on its debt. The tax rate is the rate at which a company pays taxes. The debt-to-equity ratio is the ratio of a company's debt to its equity.

The unlevered cost of capital is a useful tool for valuing companies. It can be used to compare the values of companies that have different levels of debt. The unlevered cost of capital can also be used to estimate the value of a company that is likely to change its capital structure in the future.