Equity - invested Capital

[rexthedog]

A question I saw needs a WACC calculation given the following info:

Invested capital 225

Market Cap 231

Debt 130

The weighting takes debt against Invested Capital of 225 = 57%

I originally thought it may be Market cap that is used for weightings So debt/ market cap, and equity being the plug figure (market cap - debt)/ market cap.

Could someone please clarify this. Thanks

[krokodilizm]

Market cap is the market value of equity only. The original WACC formula prescribes that the denominator be MV of (equity+debt).

See Reading 30.5

[rexthedog]

Going back to the equation,

Wd is the value of debt to total debt and equity. Why is invested capital represnting total debt and equity? Sorry this is throwing me, normally WACC calculations give you a basic equity and debt figure and its easy to see what the weightings are. Can you expand on that?

Secondly, something I get confused about with the weightings is say for example the D/E ratio is 50%. This means we use 50% debt and 50% equity right. But I have seen some examples where debt/equity = 50% which is 1/2. Therefore debt is 1/ (total) = 3 therefore debt = 33%

[krokodilizm]

Invested Capital will be like a joker in the examiner’s hand. It can take many forms and has many definitions. One of them is IC=MVlongtermdebt+MVequity. Another one is IC=Net WCInv+Net FCinv.

I suggest you compile as many definitions as possible from all over the internet because I am positive it will pop up in of the item sets…

For example, MVAdded=MV-IC…

[Flashback]

@krokodilizm

Invested Capital will be like a joker in the examiner’s hand. It can take many forms and has many definitions. One of them is IC=MVlongtermdebt+MVequity. Another one is IC=Net WCInv+Net FCinv.

I suggest you compile as many definitions as possible from all over the internet because I am positive it will pop up in of the item sets…

For example, MVAdded=MV-IC…

There are not many forms. There are 2 (accounting) approaches for invested capital:

1. An asset approach

Consider you have your own sum of $10.000 and borrow additonal $90.000 from your bank and invest $80.000 in equipment and rest of $20.000 in basic material for your production.

This $80.000 as FCInv and $20.000 as WCInv are your invested capital by asset (active or direct) approach.

2. Capital sources approach

your own $10.000 (equity) and long term debt of $90.000 which you owe to your bank are in total of $100.000

so this is just another (passive or indirect) approach of same invested capital.

[abeshak_sindhi]

@rexthedog

Secondly, something I get confused about with the weightings is say for example the D/E ratio is 50%. This means we use 50% debt and 50% equity right. But I have seen some examples where debt/equity = 50% which is 1/2. Therefore debt is 1/ (total) = 3 therefore debt = 33%

If d/e=0.5 best way to calculate is d+e=1 d/e=0.5 therefore d=0.5e subsitute this in d+e=1 you will get 1.5e=1 therefore e=1/1.5=0.6667 and debt=1-0.667=.33

[krokodilizm]

@abeshak_sindhi

@rexthedog

Secondly, something I get confused about with the weightings is say for example the D/E ratio is 50%. This means we use 50% debt and 50% equity right. But I have seen some examples where debt/equity = 50% which is 1/2. Therefore debt is 1/ (total) = 3 therefore debt = 33%

If d/e=0.5 best way to calculate is d+e=1 d/e=0.5 therefore d=0.5e subsitute this in d+e=1 you will get 1.5e=1 therefore e=1/1.5=0.6667 and debt=1-0.667=.33

Yep. I recommend these 3 shortcuts in ratio analysis.

http://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/91349977

[abeshak_sindhi]

@krokodilizm

@abeshak_sindhi

@rexthedog

Secondly, something I get confused about with the weightings is say for example the D/E ratio is 50%. This means we use 50% debt and 50% equity right. But I have seen some examples where debt/equity = 50% which is 1/2. Therefore debt is 1/ (total) = 3 therefore debt = 33%

If d/e=0.5 best way to calculate is d+e=1 d/e=0.5 therefore d=0.5e subsitute this in d+e=1 you will get 1.5e=1 therefore e=1/1.5=0.6667 and debt=1-0.667=.33

Yep. I recommend these 3 shortcuts in ratio analysis.

http://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/91349977

Great thanks man!