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I know this may sound very silly at this stage but i need step by step solution of the Geared cost of equity formula used to work out ungeared cost of equity in June 2013 Q1(a)
Keg=Keu+(1-T)(Keu-Kd)D/E
16.83%=keu+0.75 x (keu-4.76%) x 1785/1400I can not work out this formula. i made the same mistake in the exam itself. Plz break it down for as i’m extremely weak in algebraic equations and show how the answer is reached.
thanksOK
Rewriting your last line:
0.1683 = Keu + (0.75 x (Keu – 0.0476) x 1785/14000.1683 = Keu + (0.75 x Keu x 1785/1400) – (0.75 x 0.0476 x 1785/1400)
now multiply everything by 1400:1400 x 0.1683 = 1400Keu + (0.75 x Keu x 1785) – (0.75 x 0.0476 x 1785)
235.62 = 1400 Keu + 1338.75Keu – 63.7245
now add 63.7245 to both sides299.3445 = 2738.75Keu
now divide both sides by 2738.75
299.3445/2738.75 = Keu
So….Keu = 0.1093 (or 10.93%)
i’m still kinda confused as to how in this line
0.1683 = Keu + (0.75 x Keu x 1785/1400) – (0.75 x 0.0476 x 1785/1400)
you’ve split the expression and multiplied both sides by 0.75
but ill just follow and learn it as you’ve done it.
Thank you so much for the help.The last term of the original line can be written as (0.75 x 1785/1400 x (Keu – 0.0476))
So….what I have done is first multiply Keu by 0.75×1785/1400, and then multiplied -0.0476 by 0.75×1785/1400
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