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Hey
I am having trouble understanding how the specimen answer for Cost of equity is 14.09. Please Explain. It will be appreciated.
Ke = 12.46% + (0.82*(12.46% – 4.5%) * (0.20/0.8)
= 14.09%Thanks.
We know what the ungeared cost of equity is (12.46%), and so to calculate the geared cost of equity (which is what is needed) the examiner has used the first formula on the formula sheet (M&M Proposition 2 with tax).
The alternative would have been to calculate the ungeared beta based on 12.46%, then calculate the geared beta, and then calculate the cost of equity using the geared beta. It would end up giving exactly the same answer, but is much more messy and takes longer.
The value of Mining dept using FCF is 47944. And they said the company will maintain 20:80 capital structure D:E. Why can i not find the MV of equity by multiplying 47944 by (80/100)??
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