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Dear John,
I’ve got a question with regards the calculation of Ke of Chrysos: the examiner calculated the Ke in a strange for me way:
Ke = 12·46% + [0·82 x (12·46% – 4·5%) x (0·2/0·8)]
Could you please kindly explain the formula examiner used here? what I got here: 12.46% must be the proxy’s ungeared Ke; 0.82 is (1-t); 0.2/0.8 is the Debt to equity. but the (12·46% – 4·5%) looks a bit strange for me.
thank you in advance
Dimitri
In future you must ask in the Ask the Tutor Forum if you are wanting me to answer. This forum is for students to help each other.
The formula is the first one on the formula sheet that you are given with the exam – it is M&M Proposition 2 (with tax).
I explain what it is and how to use it in my free lectures on Chapter 12 of our free lecture notes.
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