CFA CFA Level 1 weight cost of capital

# weight cost of capital

• Author
Posts
• EQ_Arbitrage
Participant
• Undecided
0

If my DEBT to Equity ratio is .60 percent.  What is the weighted cost of capital that goes to debt and what amount is equity.  Also, how is it calculated?

• googs1484
Participant
• CFA Level 3
4

Don’t even have to do that much.  No need to get a reciprocal. Debt/equity is .6 so there’s .6 debt per 1 equity. So debt is .6/1+.6= .6/1.6= .375. Equity =1-.375=.675

• googs1484
Participant
• CFA Level 3
2

Always happy to help.  When I can lol

• Stuj79
Participant
• CFA Charterholder
1

If your debt to equity ratio is 0.6, that means for every 1 unit of debt you have 1/0.6 = 1.666* units of equity.

That means your debt + equity = 1 + 1.666* = 2.666*

So from that we can work out the relevant weightings for the WACC calculation as follows:

Debt = 1/2.666*= 0.375

Equity = 1.666*/2.666* = 0.625 or of course it can also be calculated as 1 – 0.375 = 0.625

ðŸ˜€

• EQ_Arbitrage
Participant
• Undecided
1

thanks, much appreciated

• syker
Participant
• Undecided
0

WACC =[ (1-t)*(D/V)*kd)] + [(E/V)*ke]
where, D=Debt
E=Equity
t=tax rate
V=D+E
kd=cost of debt
ke=cost of equity

Viewing 5 reply threads
• You must be logged in to reply to this topic.