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Hello,
I understand how to use M&M method of calculating the geared cost of equity however I am extremely confused to the answer for Tippletine when calculating the ungeared cost of equity.
I can follow the calculations up until the 10.5%+2.28% = 1.42 kie
Please can you explain where on earth the 1.42 has appeared from? I’ve found a few answers to this but I still don’t understand?
Thank you for your help!
I assume that you are happy with the first line of the workings:
10.5% = Kie + (1 – 0.3)(Kie – 5.4%)(240.8/400)
So:
10.5 = Kie + 0.7 x (Kie – 5.4) x 0.602
0.7 x 0.602 = 0.42, so the equation becomes:
10.5 = Kei + 0.42 (Kei – 5.4)
10.5 = Kei + 0.42 Kei – 2.28
10.5 = 1.42Kei – 2.28
10.5 + 2.28 = 1.42Kei
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