about debt equity ratio in qbank next, following, generate, capital

jcfa2011

hi i attempt this qns on qbank:
A firm is considering a $5,000 project that will generate an annual cash flow of $1,000 for the next 8 years. The firm has the following financial data:
Debt/equity ratio is 50%.
Cost of equity capital is 15%.
Cost of new debt is 9%.
Tax rate is 33%.
Determine the project’s net present value (NPV) and whether or not to accept it.
NPV Accept / Reject
A) +$33 Accept
B) +$4,968 Accept
C) $33 Reject
Below is the ans from the qbank.
First, calculate the weights for debt and equity
d + we = 1
d = 0.50We
e + We = 1
d = 0.333, we = 0.667
Second, calculate WACC
WACC = (wd

krause2

Vitalstrike82,
DebttoEquity (D/E) = 50% = 0.50 means that
D/E = 0.5/1
which implies that Debt is half the amount of Equity and since firm’s capital structure comprise of Debt and Equity only, Assets will be financed by just Debt and Equity.
So, Assets = Debt + Equity = 0.5 + 1 = 1.5
It means
% of Debt = 0.5/1.5 = 0.333 = 33.33% and,
% of Equity = 1/1.5 = 0.6667 = 66.67%
I hope u get it know! In case of any problem feel free to ask! Cheers!

bchadwick

oh i see.
Thanks for the guidance.

SWASH

Vitalstrike: Do you fine the QBank helpful? I’m currently trying to decide if I should order it or not. Thanks!

hw0799

It is helful due to the huge amount of questions it contains, but not as much helpful as one first could think because of its excessively quantitative nature. You may find yourself losing much time performing pointless calculations. CFAI questions are much more conceptual.
Still, if the cost doesn’t hurt you and you save time also for EOCQ, I’d say go for it. Just skip the questions regarding calculation of variances and all that stuff.

lunarfollies

Ops.. i know the reply is late cos i just happen to view if this qns whether qbank is useful while i’m doing my revision back on this debt equity qns..
From my point of view, due to the overwhelming text CFA level 1 has provide, its hard to gauge how much i have understand after studying.
The best thing with qbank is at least i know which areas i’m weak at and that will be the areas i need tp put more effort in.

stalkey

Which qbank is this?