M&M Proposition 2 Calculation

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April 11, 2013 at 2:54 pm #122181
potter2009
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Can someone explain how to calculate Ke from M&M formula
An ungeared company with a cost of equity of 12% is considering adjusting its gearing by taking out a loan at 6% to buy back equity. After the buyback the ratio of debt to equity is 1:1. Corporation Tax at 30%
Calculate new Ke.
April 11, 2013 at 6:36 pm #122193
ursali
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formula:
Keg= Keu+(1-t)*(keu-kd)*vd/ve
keg=12%+(1-0.3)*(12%-6%)*1/1
Keg= 16.2%
April 12, 2013 at 12:59 pm #122236
potter2009
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Thanks
April 12, 2013 at 1:12 pm #122240
potter2009
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What if you had to calculate the ungeared figure. As that causes me confusion
16.2% = Keu+(1-t)*(Keu-kd)*vd/ve
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