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 1785/1400
I 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.
thanks
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Geared cost of equity June 2013 Exam Q 1(a)
12y ago#1OK
Rewriting your last line:
0.1683 = Keu + (0.75 x (Keu - 0.0476) x 1785/1400
0.1683 = 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 sides
299.3445 = 2738.75Keu
now divide both sides by 2738.75
299.3445/2738.75 = Keu
So....Keu = 0.1093 (or 10.93%)
i'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.
12y ago#3The 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 0.75x1785/1400, and then multiplied -0.0476 by 0.75x1785/1400
Ok that certainly sorted it. Thanks again :)
12y ago#5You are welcome :-)
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