# Calculating R0 (Unlever cost of equity) 2012 mock

The 2012 mock had a question where we needed to caluculate unlevered Cost of equity. Any idea where the forumla came from… Im not able to derive it directly and dont see it any of the texts! Help!

re = ro + (ro-rd) (1-t)D/E

=ro+ro(1-t)D/E-rd(1-t)D/E

re+rd(1-t)D/E=ro(1+(1-t)D/E)

ro= re+rd(1-t)D/E / 1+(1-t)D/E

can u specify which question number and mock ?

Question 28 , Afternoon 2012 CFAI Mock

If this sort of a question makes it to the exam, im not too sure I’d be able to solve for it ):

Its from the MM Propositions in Corp Finance

other way pop up in my head when I read this question. I will try and tell u then if it works. But I think it’s not problem to derive a formula to sovle R0

Its based on Modigliani Miller - if they gave you a tax rate, you should probably use Prop II with taxes as above

If you use the base formula to calculate re (as in the first line above) and then plug into WACC, you will see that the WACC is lowered as D goes up

re = ro + (ro-rd) (1-t)D/E

=ro+ro(1-t)D/E-rd(1-t)D/E --------> How does this step come in … CAN ANYONE HELP!!!

re+rd(1-t)D/E=ro(1+(1-t)D/E)

ro= re+rd(1-t)D/E / 1+(1-t)D/E

Shucks, I get it now :))