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Cost of equity formula

Aannette7y ago
Hello sir, 1)Why do we use pre-tax cost of debt in the MM cost of equity for geared company? Thanks
John MoffatJohn MoffatTutor7y ago#1
Because the difference between the shareholders required rate of return (which is the same as the cost of equity) and the debt lenders required rate of return (which is the pre-tax cost of equity) is measuring the extra required for the degree of risk. To explain in more detail would require proving the formula, which is not required in the exam (and neither are you required to explain the formula, only to be able to use it).
Aannette7y ago#2
ok. thankyou!
John MoffatJohn MoffatTutor7y ago#3
You are welcome :-)
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