Compute the cost of levered equity based on market Debt to Equity ratio.

Company x has the following capital structure…

Multiplying the debt-to-equity ratio of the stock market with the unlevered cost of equity will give you the cost of leveraged equity.

The following formula is used to calculate the unlevered equity cost:
The cost of nonlevered equity = the rate at which risk is not taken + the premium for taking on that risk

The risk-free rate can be calculated by using the 10-year Treasury Bond rate, and the premium for risks is determined by betas that are assigned to asset classes.

If the ratio of market debt to equity (D/E), for example, is 0.5, and the cost of unlevered capital is 12 %, the cost of leveraged equity can then be calculated as follows:

Cost of Levered Equity = 0.5 x 12% = 6%.