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sabaruch

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tT
发表于 2011-7-13 16:24 | 只看该作者

cost of equity

remember, equity
Can't remember which book, but last night I saw:

(assuming Ke is cost of equity assuming all equity)

cost of equity = Ke + (Ke - cost of debt) (1 - t) (D/E)

Can anyone explain the application of this?

 

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bingbingliang

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发表于 2011-7-13 16:24 | 只看该作者
Miller and Modigiliani theory of capital structure.
Check it out, very short topic to read and easy to understand

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bingbingliang

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3#
发表于 2011-7-13 16:24 | 只看该作者
If you're cost of capital was all equity and you increased debt, your new cost of equity would be = Wacc ( no debt which is Previous cost of equity ) + (Wacc - Kd newly raised ) (1-t) D/E


Make sure you know the following formulas:


Value (E+D) = Ebit (1-t) / WACC


Value lev = Value un lev + (tax)(new debt)

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