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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › coeden co
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 understand
Que2)
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 = $101.65
Please 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.