BILL ADONGO

LIFE TIME:

Bill Adongo (1983-present) is a Ghanaian Actuary and Economist of all time. He is known by his Central Point Law and key inventor of the Central Economics. Below is a topic in his Central economics I have quoted from his diary.

CERTAINTITY PROPORTION THEORY

Consider W_d to be proportion of debt capital and W_e be the proportion of equity capital in the firm’s target capital structure. If the overall cost of capital is r_c=W_dr_d+W_er_e, then there is independent prediction of the cost of equity capital r_e and the cost of debt capital r_d.

r_ei=rc/2w_ei

r_d=rc/2w_di

W_e=1-W_d

(r_ei, r_di)=[(r_c/2w_ei,  rc/2w_ei  + r_c/2w_ei,..); (r_c/2w_di,  r_c/2w_di  - r_c/2w_di,..)]

Where;

r_c=overall cost of capital

W_d=the proportion of debt capital in the firm’s capital structure

r_d=the cost of debt capital

W_e=the proportion of equity capital in the firm’s capital structure

r_c=the cost of equity capital

EXAMPLE

If a bag of sugar has a target capital structure of 60 percent this year, if we expected the overall cost to be $10.4 next year.

a)what will be the cost of equity capital r_c and the cost of debt capital r_d next year.

W_d=1-0.60

r_e1=10.4/2(0.40)=13.0000

r_di=10.4/2(0.60)=8.6667

Hence, the cost of equity capital and the cost of debt capital are $13.00 and $8.67 respectively.

PROOF!

0.60r_di+0.40r_ei=10.4

0.60(8.6667)+0.40(13.0000)=10.4

5.20+5.20=10.4

10.4=10.4