标题: Debt/Equity vs. Debt/Capital?? [打印本页] 作者: fishmarket 时间: 2011-7-13 13:24 标题: Debt/Equity vs. Debt/Capital??
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?作者: OmarAdnan 时间: 2011-7-13 13:24
So long as you get the right answer , what does it matter?
DR=D/(D+E) . So work it out.作者: onelife1 时间: 2011-7-13 13:25
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.作者: tikfed 时间: 2011-7-13 13:25
Thanks for getting me straight on this.作者: bingbingliang 时间: 2011-7-13 13:25
Dreary, what about this situation:
Target Debt to Equity Ratio = 0.30
Re = 18%
Kd = 10%
Tax Rate = 30%
What's the wacc?作者: tarunajwani 时间: 2011-7-13 13:25
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% 作者: bdavi77962 时间: 2011-7-13 13:25
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.作者: tianxin 时间: 2011-7-13 13:25
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作者: hassan 时间: 2011-7-13 13:25
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.作者: Analyze_This 时间: 2011-7-13 13:25
Good point janakisri - need to make sure I break down the D/E ratios like that when given from now on.
Thanks.作者: yospaghetti 时间: 2011-7-13 13:25
oh man... you're right, although I have not seen it in CFAI texts as that. They usually say D/E = 30/70, etc.作者: jacksparrow 时间: 2011-7-13 13:25
