- This topic has 5 replies, 2 voices, and was last updated 8 years ago by
John Moffat.
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- May 16, 2016 at 3:38 pm #315339
Good Evening
lets suppose we are given equity beta, debt beta and D/E ratio and the tax rate for a company. will the following be correct or plausible or acceptable:
(a)
asset beta = the big ugly exam formula which uses asset beta and debt beta
Ke1 = rf + asset beta x (rm-rf) – this wd give the ungeared cost of equity
Kd = rf + debt beta x (rm-rf)
Ke = rf + equity beta x (rm-rf) – this wd give the cost of equity which takes gearing in account
thank uMay 16, 2016 at 9:45 pm #315368Correct 🙂
May 17, 2016 at 8:28 am #315418thank u sir!
i have a related question:
the formula
Ke=Ke1 + (1-T)(Ke1-Ke)(Vd/Ve) – ( Ugly 2 formula)
1. the Ke1 calculated in the above post can be used to give the Ke using Ugly 2 formula?
2. and we wd get the same approximate answer if we used CAPM WITH EQUITY BETA?
3. and we can also calculate Ke1, using Ugly 2, having calculated Ke using CAPM?May 18, 2016 at 7:17 am #315538All three statements are correct (the formulae are related).
May 18, 2016 at 4:49 pm #315673thank u!
May 19, 2016 at 7:39 am #315733You are welcome 🙂
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