I'm not too sure on the logic of rearranging the formula in order to get the 1.42 Kie figure below - please could someone explain? I understand how the 2.28 is calculated but I'm not sure where the 1.42 comes from?
MV debt = $240.8m
MV equity = $400m
Ke = 10.5%
Kd = 5.4%
T = 30%
10.5% = Kie + (1 - .3)(Kie - 5.4%)(240.8/400)
10.5% + 2.28% = 1.42 Kie
Kie = 9%
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M&M Proposition 2 formula
3y ago#110.5 = Kie + 0.7(Kie - 5,4))(240.8/400)
10.5 = Kie + 0.7(Kie - 5.4) 0.602
10.5 = Kei + 0.4214 (Kei - 5.4)
10.5 = Kei + 0.4214 Kei - 2.2756
10.5 + 2.2756 = 1.4214Kei
(your printed answer has obviously rounded everything to 2 decimal places)
Thank you John! The main bit I was missing was how we end up with '1.4214', but now I can see that we assume the Kie in the 4th line is '1'.
3y ago#3You are welcome (although it is not an assumption - Kei has to equal 1 x Kei :-) :-) )
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