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Tippletine Co – Ungeared Cost of Equity

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Tippletine Co – Ungeared Cost of Equity

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.
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  • Author
    Posts
  • October 31, 2023 at 4:29 pm #694253
    sophwilliamson
    Participant
    • Topics: 1
    • Replies: 0
    • ☆

    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!

    November 2, 2023 at 8:43 am #694306
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    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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