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Dear Sir,
please help me undarstand why while calculating ungeared cost of equity using MM formula I have to take 4,5% as a cost of debt?? 4,5% is 5y govement debt yield not a cost of debt of Haizum Co. Am I wrong?
Regards,One of the assumptions made by MM in deriving the formula is that debt is risk free, and therefore the cost of debt should be the same as the risk free rate. In practice (and obviously in this question) the two are not the same and so the examiner allowed either rate to be used (even though obviously the final answer is different).
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