manual of financial concepts
YIELD ADJUSTED TO LEVERAGE
Yield required by the market, considering the leverage of the company (Ke).
The formula for the calculation is:
Ke = Ku + ((PTF/POF) * (1-t) * (Ku – Cost TF))
Ku: Yield required by the market without debt.
PTF: Proportion of third party financing in relation to total sources of financing.
POF: Proportion of own financing in relation to total sources of financing.
t: Income tax rate.
Cost TF: Cost of third party financing before taxes.
The yield will be higher or lower in relation to the level of debt. So, with a higher level of debt, there is more risk for the company, and a higher yield should be required by the investor.
Example of ke calculation: