Leverage Ratio: Calculate Equity Capital

CFA Level I Equities
#1

Hi everybody

A question regarding the calculation of the Equity Capital with the Leverage ratio in margin investment. I am confused in the calculation of the initial Equity.

Shareprice = $22 Leverage Ratio = 1.6 In the solution, the calculation for the Initial Equity is done like this: $22/1.6 = $13.75 (62.5%), Amount Borrowed = $8.25 My calculation would be: (1 - 1.6/2.6) * $22 = $8.46 for the Initial Equity.

Where do I make the mistake? Many thanks for your help!!

Carlo

#2

Leverage Ratio=Total Asset / Total Equity.

Here, Equity implies your investment.

So, 1.6 = 22/TE, got TE=13.75

You probably didn’t realize there’s a formula here.

Hope this helps!

#3

Initial equity (out of your own pocket) is [1 / leverage ratio] which is known as the margin requirement.

Here, [1 / 1.6] = 0.625 = margin requirement. This means 62.5% of the total investment is equity, 37.5% is borrowed money.

#4

Thanks to both of you.

I made a confusion with Leverage Ratios (as an aggregation) and the Financial Leverage Ratio, which you showed me in your answers.