bodhisattva

”ro” refer to wacc for all-euity company but all-euity company is one of many possibilities of wacc that should applied to wacc=re*E/(D+E)+rd*(1-t)*D/(D+E) formula

ohai

I also saw the same formular (Re= Ro + D/E*(1-t)*(R0-Rd)) in the shweser note.
So, is shweser note also wrong?
I think it is not!
You are wronging!
Please renember that, R0 is the cost of all equity company.
WACC is cost of equity and debt firm.

FVPV

thank u for your response cpk123
so this formula is wrong and EOC answer questions that based on this formula are wrong too

Siddimaula

go to their website - and it is there to find out.
or send an email to info@cfainstitute.org and mention Erratum … on the mail subject
with pg #, and details …. in the body

DarienHacker

how can I report it to CFA institute?!!!
is there any link or email address for reporting errata?!!!!

JustasS

that formula you derived
as re = ro + (ro-rd(1-t))D/E is the right one.
This should be an erratum item. If it is not, please report it. This has been corrected in previous years as well, but probably the original author’s reading never gets corrected..

Siddimaula

u are right,”ro” refer to wacc for all-euity company but all-euity company is one of many possibilities of wacc that should applied to wacc=re*E/(D+E)+rd*(1-t)*D/(D+E) formula.
re= r0+ (r0-rd) (1-t) D/E and wacc=re*E/(D+E)+rd*(1-t)*D/(D+E) must be equivalent,but they aren’t.
in perivious curriculum of CFA ,re= r0 + (r0-rd (1-t)) D/E formula have been used but in 2012 curriculum this formula changed to re= r0+ (r0-rd) (1-t) D/E.
whats wrong?!!!

morebeans

you are wrong when refer WACC=r0
In this topic (Capitap Structure)     “ro” refer to WACC for all_equity company

atate2007

wacc=re*E/(D+E)+rd*(1-t)*D/(D+E)   ===  (wacc*E)+(wacc*D)=re*E+rd*(1-t)*D
===  (wacc*D)-(rd*(1-t)*D)=(re*E)-(wacc*E)  ===  (wacc-rd*(1-t))*D=(re-wacc)*E
=== (wacc-rd*(1-t))*D/E=re-wacc ===wacc+(wacc-rd*(1-t))*D/E=re
in capital structure reading we suppose:WACC=r0 so:
re= r0 + (r0-rd*(1-t))*D/E
this is right formula but in this reading we have this formula :re= r0+ (r0-rd) (1-t) D/E
2 of EOC questions is based on this wrong formula!!!!!