A debt equity ratio of 0.5 means that 1/3 of the total capital is debt and 2/3 of the total capital is equity, i.e. 1/2. I am getting confused here…can someone clarify??
debt / equity = 0.5 debt = 0.5* equity debt + Owners’ Equity = total capital 0.5* equity + 1 * equity = total capital Therefore 2/3 of total capital is equity.
Lol thanks tsttse…I didn’t though about that! I slept 2 hours last night…and these are the effects.
%of Equity = 1/(1+D/E)
"A debt equity ratio of 0.5 means that 1/3 of the total capital is debt and 2/3 of the total capital is equity, i.e. 1/2. " yes You want to find the weight of debt in the capital structure. Wd = D/E / (1 + D/E) Wd = .5/1.5 = 33% or Weight of equity is simply 1 - Wd, or 1 - 33% == 66% This is the clearest way to think about it, as weights and remember this handy formula