Unlevered cost of equity

Unlevered cost of equity

The discount rate appropriate for an investment that it is financed with 100% equity.
References in periodicals archive ?
Assuming perpetual and constant cash flows and that the appropriate discount rate for the dividend tax shield is the unlevered cost of equity (Ku, per our terminology, see section 2), they calculate the extra value the share holders get because the deductible dividends and a modified expression to evaluate the debt advantage for Brazilian firms.
Fernandez (2004), controversially, argue that the debt tax shield should be calculated as the unlevered cost of equity times debt times the tax rate times (Ku x D x T) and that the appropriate discount rate is K u.
The implications of this assumption were examined in Miles and Ezzell (1980), who noted that the approach not only assumed tax savings that would grow in perpetuity but that these tax savings were, in effect, being discounted as the unlevered cost of equity to arrive at value.
This can be accomplished by valuing the firm as if it had no debt, i.e., by discounting the expected free cash flow to the firm at the unlevered cost of equity. In the special case where cash flows grow at a constant rate in perpetuity, the value of the firm is easily computed.
Capital charges for Departments are based on a weighted average of the costs of both debt and equity capital whereas the SOE methodology uses an unlevered cost of equity.