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How Ke is calculated

Forums › ACCA Forums › ACCA AFM Advanced Financial Management Forums › How Ke is calculated

  • This topic has 1 reply, 2 voices, and was last updated 8 years ago by John Moffat.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • February 23, 2018 at 10:10 am #438554
    selimdu
    Participant
    • Topics: 3
    • Replies: 5
    • ☆

    I was going through BPP exam kit Q 71.

    They calculated Cost of Equity (Ke) as below;

    Ziwa’s Co MV of debt 1785 M$ and MV of equity 1400M$.
    Ziawa’s cost of capital is 9.4% and geared cost of equity is 16.83%. Pretax cost of debt is 4.76%. Tax rate 25%

    The cost of equity is calculated as;

    16.83%=Ke+.75(Ke-4.76%) x 1785/1400
    Ke=10.93%

    I am not understanding how this formula is derived or why they calculate in this way.

    Kindly help.

    Thanks.

    February 23, 2018 at 2:43 pm #438583
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54831
    • ☆☆☆☆☆

    You are not expected to be able to derive the formula – it is M&M Proposition 2. The first formula on the formula sheet.

    Using the formula is explained in Chapter 12 of our free lecture notes, and the free lectures that go with it.

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  • The topic ‘How Ke is calculated’ is closed to new replies.

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