cost of equity remember, equity

sabaruch

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?

bingbingliang

Miller and Modigiliani theory of capital structure.
Check it out, very short topic to read and easy to understand

bingbingliang

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)