RepoToronto

And here's the whammy.... that is straight from Schweser and here's the correct answer:

Debt to capital ----- 23.08% ----- Debt-to-equity divided by one plus debt-to-equity:
0.30 / (1 + 0.30).

After-tax cost of debt ----- 7.00% ----- Cost of debt times one minus tax rate: 10%

bdavi77962

This is weird..and that's why I never use Schweser.

Debt to Equity Ratio = 0.30 means take your debt divide by equity and you get 0.30. That can only happen if equity is 3 times and 1/3 of debt, i.e., equity = 3.333 x (0.30)= 1.00, and debt =0.30, for any amounts of debt and equity.

In some context, it may be possible to argue that D+E does not equal assets (A), say you are taking debt as long-term debt only...in that case, may be Schweser has a point.

tarunajwani

WACC = 0.30 ((0.10)(0.7) + 0.70 (0.18) = 14.7%

bingbingliang

Dreary, what about this situation:

Target Debt to Equity Ratio = 0.30
Re = 18%
Kd = 10%
Tax Rate = 30%

What's the wacc?

tikfed

Thanks for getting me straight on this.

onelife1

It should be D/(1-D)

Debt = $1 million, Equity=$2 million. What's your D/E ratio? (1/3)/(2/3), or 33/67 (note that 33+67 =100).
What's your D/(1-D)? It is (1/3)/(1-(1/3)) = 33/67.


Debt = $1 million, Equity=$3 million. What's your D/E ratio? (1/4)/(3/4), or 25/75 (note that 25+75=100).
What's your D/(1-D)? It is (1/4)/(1-(1/4)) = 25/75.

OmarAdnan

So long as you get the right answer , what does it matter?

DR=D/(D+E) . So work it out.