Rd = Interest Rate(1-Tax Rate)
     = (Riskfree Rate + Credit Spread)(1-Tax Rate)

The Credit Spread is a function of the individual company's credit risk, and the market price of credit risk.

2. Cost of equity, based on the Capital Asset Pricing Model (CAPM) is the required return on common stock if the company were to go to the market today, taking into account its business risk and leverage risk. The CAPM formula, which assumes that investors are well diversified, is:

Re=Rf+Beta(Rm-Rf)
ie Return on Equity= Riskfree Rate + Levered Beta(Market Return - Riskfree Rate)

We start with the company's current (levered) beta, then obtain the unlevered beta, then see what the beta would be at different levels of leverage:

The current unlevered beta is Betaunlev=Betalev/(1+(1-tax rate)(D/E)) =
Current debt/equity (D/E) ratio = total debt/(share price*shares outstanding)
The levered beta is found from: Betalev=Betaunlev(1+(1-tax rate)(D/E)

3. Weighted Average Cost of Capital is:

WACC = Rd(D/C ratio)+Re(E/C ratio)

Debt/capital (D/C) ratio = total debt/(total debt +share price*shares outstanding)
Equity/capital (E/C) ratio = total equity/(total debt +share price*shares outstanding)

• Leverage and Equity Returns
• Valuing a Company