Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Geared cost of equity June 2013 Exam Q 1(a)
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John Moffat.
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- November 28, 2013 at 10:07 am #148227
I know this may sound very silly at this stage but i need step by step solution of the Geared cost of equity formula used to work out ungeared cost of equity in June 2013 Q1(a)
Keg=Keu+(1-T)(Keu-Kd)D/E
16.83%=keu+0.75 x (keu-4.76%) x 1785/1400I can not work out this formula. i made the same mistake in the exam itself. Plz break it down for as i’m extremely weak in algebraic equations and show how the answer is reached.
thanksNovember 28, 2013 at 10:15 am #148230OK
Rewriting your last line:
0.1683 = Keu + (0.75 x (Keu – 0.0476) x 1785/14000.1683 = Keu + (0.75 x Keu x 1785/1400) – (0.75 x 0.0476 x 1785/1400)
now multiply everything by 1400:1400 x 0.1683 = 1400Keu + (0.75 x Keu x 1785) – (0.75 x 0.0476 x 1785)
235.62 = 1400 Keu + 1338.75Keu – 63.7245
now add 63.7245 to both sides299.3445 = 2738.75Keu
now divide both sides by 2738.75
299.3445/2738.75 = Keu
So….Keu = 0.1093 (or 10.93%)
November 28, 2013 at 10:29 am #148237i’m still kinda confused as to how in this line
0.1683 = Keu + (0.75 x Keu x 1785/1400) – (0.75 x 0.0476 x 1785/1400)
you’ve split the expression and multiplied both sides by 0.75
but ill just follow and learn it as you’ve done it.
Thank you so much for the help.November 28, 2013 at 10:32 am #148239The last term of the original line can be written as (0.75 x 1785/1400 x (Keu – 0.0476))
So….what I have done is first multiply Keu by 0.75×1785/1400, and then multiplied -0.0476 by 0.75×1785/1400
November 28, 2013 at 10:48 am #148246Ok that certainly sorted it. Thanks again 🙂
November 28, 2013 at 10:55 am #148250You are welcome 🙂
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