In this session we just come up with the mathematical in a nation of immigrants.
For this we first need the wiitwd average cost of capital.
If you recall that in the schools we had a dedicated section for reach an average cost of capital that
we have in depth.
Understood the formula for the weighted average cost of gaffed.
So I didn't go into the detail in this session just to point out the differences between the weighted
average cost of capital discussed in that session and what we're doing here.
So if you notice that the formula that they've used for back at is the weighted average cost of capital
over here is slightly different from what we discussed in the session for the weighted average cost
of capital.
Your back is equal to the market which is the value of it of the company in cost of debt of the company
divided by the gap.
That is the market value of including that an equity of the company plus the value of it could be of
the company that is earmarked in our cost of it would be recall that we have learned how to compute
the cost of equity using the CPM.
This divided by the total value again.
So we've not considered the x over here and we have computed the cost of it because aspart and Memphians
one of their assumptions is that there is no X in water and that's the difference between this formula
and the formula that you discussed earlier.
Just to give a brief on the rack as a reminder of buying Black is nothing but the cost of it in the
proportion of it.
In the capital of the farm plus the cost of equity in the proportion of it would eat in the captain
of the farm.
The proportion of debt and equity are the rates in the average family.
It's now that we have the average capital fund.
Now let's consider all equity for this and unleveraged for let Ru be the cost of capital of such a fall.
We've already seen the mathematical interpretation of a principle one which has value if you vote for
him as equal to the value of the vote for him to really try and expand this mathematical formula.
By your fevered from would be the cash flows of louvered full divided by weighted average cost of capital.
That is we are finding the discounted cash flow which is the value of the full This will be equal to
the value of under-vote.
-- cash flow from Andreeva from divided.
I argue that this the weighted average cost of an uneventful we've discussed earlier that the cash flow
from either earlybird or any form is not affected by the sort of capital that is used to generate such
cash flows.
And both of them would be equal in our formula with strike of the equal booms and the remaining simplification
of law gives us back equals are you at this cost of gap.
Unclever from now we will replace this RU in our family four lack that we've computed earlier this will
keep us fit.
Oddy we quiz market value of it in cost of it divided by Dalty market value of capital of the company
plus market value if we could do Astafy equally divided by market value of the capital.
It is this fomula I'm for the Simplifier after which we get to be quite easy.
The cost of unlimber foam plus the cost of omnibook from minus cost of it in value of it divided by
Bajur.
It could be
that you've dealt with a lot of formulas just did a fresh memory.
Adi was the pasta companies with the odd you was the cost of an unevolved fund that is an all liquid
form.
R D was the cost of it of the company.
The market was the market value of it of the company and EMA it is the value of it could be of the company.
All of that we've done so far is that if aken the fall fullback thief and the principal ones mathematical
interpretation and Vihar just based those formulas aside for the cost of it would be no not a formula
that you derived this are you minus Arvie it is simple logic.
The cost of it could even be greater than the cost of it because the cost of equity involves risk.
There was no risk and cost of an antibody would always be greater than an diskless that in our formula
we have the market divided by market.
So clearly if it increases then the stuff it put you would also increase.
This is what Ed Memphians States Hinz we have at I have the mathematical representation of morbidity
and Milad principal risk to equity horded rises with leave rates rises with that Aizen component in
the structure.
Let's try and understand the relationship of cost of equity and debt pump and in in the GraphicLy diagram
in the X-boxes block that it would show and in the Y-axis be the cost of capital.
Now the cost of it will remain constant.
We've established that the cost of gap is not affected by the proportion of equity or debt in the capital
structure that is it is the same for lead based on an unlive raged for the cost of equity would drive
us in is the.
It could easily shoot ISIS.
This is the graphic representation for our relationship.
I asked the company and in the capital structure crisis so does the cost of equity.
But the cost of an ugly word that is known it can.
It would remain constant with just the same mass of rock so higher that risk is higher that it higher
risk the cost of equity the solid and Prince.
But remember in all the medication that we've just done we have stuck.
The most important option of Memphians.
This is no X is involved if X is involved in this scenario would not hold true.