CFA CFA Level 1 Question of the Week – Corporate Finance

Question of the Week – Corporate Finance

  • Author
    Posts
    • AdaptPrep
      Participant
      Up
      0
      Down

      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%
    • AdaptPrep
      Participant
      Up
      4
      Down

      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.

Viewing 1 reply thread
  • You must be logged in to reply to this topic.