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Hello Sir
Que 1)
i understand that when calculating cost of equity using dividend valuation model the formula is ke = [Do (1 + g)/ Po] + g but the Market value of equity was calculated as follows;
MVe = 2,600 × 1.0424/(0.106 – 0.0424) approximately = $42,614,000
i don’t understand why it was done this way please help me understandQue2)
After implementing the proposal, i dont understand where they found the cost of debt of 4.6% in calculating the present value as follows;
MVd = Per $100: $5.2 × 1.046–1 + $5.2 × 1.046–2 + $105.2 × 1.046–3 = $101.65Please assist
1. If you look at the formula sheet, then Po = Do(1+g) / (Re – g) and that is the formula that has been used. (It is the same formula that you have written but re-arranged).
2. The question says that the cost is 60 basis points above the risk free rate. The risk free rate is 4% so the cost if 4% + 0.6% = 4.6%
okay i understand now thank you. how was the debt to equity ratio calculated here after implementation…
Cost of capital = 9.6% × 0.769 + 4.6% × 0.231 × 0.8 = 8.2%The answer calculated the total MV’s of each of equity a debt.
0.769 and 0.231 are, as normal when calculating the WACC, the proportions of equity and debt respectively to the total MV of equity plus debt.
Good day sir, usually when we want to find Cost of equity, we use CAPM method however the beta normally will use equity beta which means with the presence of business and financial risk from debt and equity financing used in the company. Thus when calculating KE we need to take in consideration of both risks in CAPM formula?
If a company has only debt financing or equity financing, beta in capm will only include its own risk. But if financed by equity and debt, then the ke should have the impact of both risk? Is my understanding correct sir?Equity beta = business and financial risk (debt and equity financing)
Asset beta = business risk (equity financing solely)Because in Coeden Co, we have used the equity beta (0.92) to find ke through CAPM instead of asset beta of (0.75).
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