CFA CFA Level 1 weight cost of capital

weight cost of capital

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    • Avatar of EQ_ArbitrageEQ_Arbitrage
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        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?

      • Avatar of googs1484googs1484
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          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

        • Avatar of googs1484googs1484
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            Always happy to help.  When I can lol

          • Avatar of Stuj79Stuj79
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              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

              😀

            • Avatar of EQ_ArbitrageEQ_Arbitrage
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                thanks, much appreciated

              • Avatar of sykersyker
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                  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

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