Calculate the unlevered equity if the cost of equity is 20% the cost of is 7% and the capital is 50% equity and 50% debt Solution Using MM hypothesis proposition II, We have following formula for rE rE= Ru + D/E (Ru-Rd) 0.20= Ru + 0.50/0.50(Ru -0.07) 0.20 = Ru +Ru-0.07 2 Ru = 0.27 Ru = 0.27/2 =0.135 Ru = 13.50% Hence, unlevered cost of equity is 13.50%..