You are an investment banker trying to value Dell, a private company. You have forecasted Dell's free
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Question:
You know the following: Dell has debt of $600 at a cost of 5%; further, Dell recently raised money from equity investors, valuing the equity at $800. HP is in the same exact business as Dell, but it is public so you can see its cost of equity. HP is financed with a constant debt-to-equity ratio of 3/10, has a cost of debt of 3%, a cost of equity of 22%, and a tax rate of 30%.
Find the unlevered cost of capital for Dell and HP. Assume that HP's debt-to-equity ratio will stay constant foreve?
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