Can someone explain how to calculate Ke from M&M formula
An ungeared company with a cost of equity of 12% is considering adjusting its gearing by taking out a loan at 6% to buy back equity. After the buyback the ratio of debt to equity is 1:1. Corporation Tax at 30%
Calculate new Ke.
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AFMM&M Proposition 2 Calculation
formula:
Keg= Keu+(1-t)*(keu-kd)*vd/ve
keg=12%+(1-0.3)*(12%-6%)*1/1
Keg= 16.2%
Thanks
What if you had to calculate the ungeared figure. As that causes me confusion
16.2% = Keu+(1-t)*(Keu-kd)*vd/ve
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