Reading 45, Question 4 and Question 7, CFA Practice Problem 445, 555, exactly, getting, numbers

robjames1984

Question 4  I keep getting an error when I type in the TVM numbers, trying to solve for I/Y (the six month yield). What am I doing wrong? I type it in exactly as the answer states…..
Question 7  It says that the target debttoequity ratio is 0.8033. How do they get the respective weights of .445 for Debt and .555 for Equity?? This probably so simple but please help…..

lxwarr30

Q4.
FV = 1000 (outflow)
PV = 900
N =10 (semi annual)
PMT = 40 ( 0.08/4 x 1000)
CPT 1/y …Ans. 5.31 This is the semi annual yield.
After tax yield = ( 5.31 x 2 ) x (1 0.38) = 6.59 %
Q.7
D/E = 0.8033
D/(D+E) = 0.8033/(1+0.8033)
E/(D+E) = 1/(0.8033 + 1)

spartan1

correction
Q4.
PMT = 40 if you take FV = 1000
alt you can take PV = 900 and FV = 1000 and PMT = 40

lxwarr30

why does EQ get 1 here? How do you decide that? I was originally thinking D = .8033 and E =(1.8033)?
Q.7
D/E = 0.8033
D/(D+E) = 0.8033/(1+0.8033)
E/(D+E) = 1/(0.8033 + 1)

suyash1989

This is the D/E ratio that is given as 0.8033
So given D/E = 0.8033 = 0.8033/1
So 1+D/E = 1.8033
(D+E)/E = 1.8033
or E/(E+D) = 1/1.8033 = .5545
So D/(E+D) = 1  .5545 = .4455
CP

joemoran

when you do E = 1 0.8033
that means debt is 0.8033 or 80.33% of the total capital while the debtto equity ratio is the ratio of total debt to total equity ::: D/E !