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How to calculate cost of equity and market value of a firm?
Solution
The solution is as follows −
| Debt ratio | Equity | Debt | Cost of debt | WACC | Interest Expenses (I) | Market value of a company (V) | Market value of Equity (E) | Net operating income (EBIT – I) | Cost of equity (Ke) |
|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 3500000 | 0 | 10% | 11.5% | 0 | 3625000 | 362500 | 3625000 | 10% |
| 0.20 | 2800000 | 700000 | 10% | 11.5% | 70000 | 3625000 | 292500 | 3555000 | 8.07% |
| 0.45 | 1925000 | 1575000 | 10% | 11.5% | 157500 | 3625000 | 205000 | 3467500 | 5.65% |
| 0.70 | 2450000 | 2450000 | 10% | 11.5% | 245000 | 3625000 | 117500 | 3380000 | 3.24% |
| 1.00 | 0 | 3500000 | 10% | 11.5% | 350000 | 3625000 | 12500 | 3275000 | 0.35% |
Equity = book value * (1-debt ratio)
Debt = book value * debt ratio
Interest (I) = debt * cost of borrowed
Market value of a company (V) = EBIT/WACC
Market value of equity (E) = V – I
Cost of equity = E/V
Updated on: 28-Sep-2020
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