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Hi john,
I’m not sure if I’ve overloaded my brain too much in the past 2 days but I’m not understanding how to calculate the ungeared cost of equity by rearranging the M&M formulaAre you able to help on rearranging the below:
0.12 = keu + 0.75 x (keu-0.05) x 500/200I understand that I times 0.75 and 500/200 together, but then I get lost.. perhaps my algebraic knowledge is very bad. Thanks in advance
0.12 = Keu + 0.75 x (Keu – 0.05) x 500/200
Multiply 0.75 by 500/200:0.12 = Keu + 1.875 x (Keu – 0.05)
Multiply each item in the brackets by 1.875:
0.12 = Keu + 1.875 Keu – 0.09375
Add 0.09375 to both sides:
0.21375 = Keu + 1.875 Keu
So 0.21375 = 2.875 Keu
Keu = 0.21375 / 2.875 = 0.07435
When u add 0.09375+1.875=1.96875
So where is that 2.875 comes from? Little confusedGood heavens!!
Nobody is adding 0.09375 + 1.875 !!
If you add 0.09375 to both sides then you get:
0.12 + 0.09375 = Keu + 1.875Keu – 0.09375 + 0.09375
Which gives:
0.21375 = Keu + 1.875Keu
( Keu + 1.875Keu is equal to 2.875Keu )
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