Debt/Equity vs. Debt/Capital?? problem, another, completely, understand

fishmarket

Can someone please make sense of this for me. Sometimes (according to Schweser) it's ok to use Debt/Equity to calculate wacc but other times you have to use the DR / (1+DR).

The use of it seems completely illogical (even in the Mock today one problem used D/E and then another you were supposed to use the DR/(1+DR).

Does anyone understand when you're supposed to use them?

ryanlb

Guys, check this out. Just treat like an algebra equation from highschool.

For instance, if E/D = 0.3, well you also know that E + D = 1.0. So, just solve for E....or D for that matter.

luda002

jeff,

D/E = 0.3
means
D:E = 0.3 : 1

D/(D+E) = 0.3/(1+0.3)=0.3/1.3
E/(D+E) = 1/1.3

CP

firat

I look at it as if D/E= 0.3, then D:E =1:0.3, then debt =(1/1.3) and equity=0.3/1.3

RMontgomery

> D/E = 3/10
> Debt weight 3/13
> Equity Weight 10/13

That's easier to remember! Thanks.

jacksparrow

easiest way is debt to equity =0.3

Result is D/E = 3/10

Weight are always (D/(D+E)) and (E/(D+E))

Debt weight 3/13
Equity Weight 10/13

yospaghetti

oh man... you're right, although I have not seen it in CFAI texts as that. They usually say D/E = 30/70, etc.

Analyze_This

Good point janakisri - need to make sure I break down the D/E ratios like that when given from now on.

Thanks.

hassan

Debt to Equity Ratio = 0.30, so Debt/Equity=0.3

and Debt+Equity = 1.0

So Debt = 1-Equity

or 1/Equity -1 =0.3
or Equity = 1/1.3 = 0.76923 and debt = 0.23077.

So Dreary is incorrect in saying : "WACC = 0.30 ((0.10)(0.7) + 0.70 (0.18) = 14.7%"

It should be 0.77*18+0.23*10*0.7 = 15.475



Edited 2 time(s). Last edit at Saturday, May 22, 2010 at 08:19PM by janakisri.

tianxin

Yeah, there's just no reason why that's used (and Schweser does it in other places too).

Would love to know if someone can come up with an explanation