bingbingliang

Couple thoughts:

1. Because the amounts given in the problem were: Equity was $77,793, Liabilities $122,027, Assets $200,000. If Debt to Capital is 50%, then debt is the same as the equity figure (they are both 50% each). So the interest bearing part or debt financed part of the liabilities is $77,793 of the $122,027 total liabilities figure. Therefore the invested capital base = $77,793 * 2 or (equity of $77,793 + debt $77,793).

2. I notice the problem specifically says, "Debt/Value is 50%." Not Debt/Capital (as I typed). Which is an oversight by my part and could possibly change the calculations slightly (but still leaving CFAI's answer as wrong). I'm not sure what Debt/Value actually implies and it's a pretty amorphous statement. Debt to value of what? Book value of assets? Value of capital invested in the business? I took it as being 50% of the capital invested in the business, so I just multiplied the equity figure by 2 and assumed the remaining liabilities to be non-interest bearing. But it's not entirely clear.

Outside of the poor wording, I still think they are teaching people the wrong way to calculate economic profit. It's not the way Goldman or Deustche Bank does it. I'm not familiar with anyone at any university teaching finance this way. The curriculum really should be changed.