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Up1
Ated Technology’s debt/equity ratio is 70%, and the company wants to maintain that ratio. When calculating the weighted average cost of capital, the weight given to the cost of equity (w_e) is closest to:
- 50%
- 60%
- 70%
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Up4
One way to calculate this is to adjust the debt weighting
formula:w_e = E / (D + E) = E/E / (D/E + E/E) = 1 / (0.7 + 1) = 0.59
Sometimes the easiest way to solve problems like this is to
put in fake numbers. If D/E = 0.7, then we could set D = 7 and E = 10. The
equity weight would then be 10 / (10 + 7) = 0.59.
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