Calculating WACC Elan

CFA Level II
#1

Ok. Can’t figure out how they are getting the the Debt and Equity weights being used to solve for WACC. This is from the blue box problem in Elan Equity book Section Free Cash Flow Valuation pg. 21. Information given is:

Target debt to equity: 0.4

of common share: 300mm

MV of debt: 1.2billion

The weights they are using to calculate WACC are (0.4/1.4) for debt and (1/1.4) for equity.

Anyone know how they are calculating the weights? Can’t for the life of me figure it out.

#2

* should read target debt to equity RATIO = 0.4

#3

You use the target weights in computing the WACC.

D/E = 0.4 means 0.4 units of debt for each unit of equity. 0.4/1 = 0.4

Weight of debt = 0.4/(1+0.4)

Weight of equity = 1/(1+0.4)

#4

That makes sense. Thx Cinderalla… I was getting confused by trying to mix in the MV of debt into the calc.

#5

Don’t confuse

Target debt to equity: 0.4

with

Target debt ratio: 0.4

Two different things.