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Hi guys,
My maths is failing me right now… and I was wondering if someone could help…
When looking at ungeared cost of equity for the APV calc in this particular question.
We have the following info available:
Ke = 10.5%
Kd = 5.4%
Ve = $400m
Vd = $240.8m
t = 30%
Kie = ???Using the formula: Ke = Kie + (1-t) x (Kie – Kd) x Vd/Ve
Looking at solutions:
0.105 = Kie + (1-0.3) x (Kie – 0.054) x (240.8/400)
0.105 + 0.0228 = 1.42 x Kie
Kie = 0.09 i.e. 9%Can someone please explain (step by step) how we are getting the 9%. I am especially confused as to how we are getting the 1.42 x Kie…
Thank you so much in advance for your help!
Hi,
Hope this could solve your problem:
0.105 = Kie + (1-0.3) x (Kie – 0.054) x (240.8/400)
0.105 = Kie + (0.7) x (Kie – 0.054) x (0.602)
0.105 = Kie + (0.4214) x (Kie – 0.054)
0.105 = Kie + 0.4214 x Kie – 0.0228
0.105 = Kie + 0.4214 x Kie
0.105 + 0.0228 = 1 x Kie + 0.4214 x Kie > Remark: every unknown is = x1, ie, Kie = 1 x Kie
0.105 + 0.0228 = 1.4214 x Kie
0.1278 = 1.4214 x Kie
0.1278 / 1.4214= Kie
0.0899 = Kie
Kie = 0.09 i.e. 9%
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