Please help - Ungeared cost of equity - Kaplan Practice Q47 (Tippletine Co)

Former user4y ago

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!

PPhuahSupporter4y ago#1

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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