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

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)

bingbingliang

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