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: 2020-09-28T11:20:59+05:30

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