YIELD ADJUSTED TO LEVERAGE

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))

Whereas:

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:

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