CFA CFA Level 1 weight cost of capital

weight cost of capital

  • This topic has 5 replies, 4 voices, and was last updated Apr-18 by syker.
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  • EQ_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?

    Stuj79
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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

    😀

    googs1484
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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

    EQ_Arbitrage
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    thanks, much appreciated

    googs1484
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    Always happy to help.  When I can lol

    syker
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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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