# Reading 45, Question 4 and Question 7, CFA Practice Problem

Question 4 - I keep getting an error when I type in the TVM numbers, trying to solve for I/Y (the six month yield). What am I doing wrong? I type it in exactly as the answer states… Question 7 - It says that the target debt-to-equity ratio is 0.8033. How do they get the respective weights of .445 for Debt and .555 for Equity?? This probably so simple but please help…

Q4. FV = -1000 (outflow) PV = 900 N =10 (semi -annual) PMT = 40 ( 0.08/4 x 1000) CPT 1/y …Ans. 5.31 This is the semi annual yield. After -tax yield = ( 5.31 x 2 ) x (1- 0.38) = 6.59 % Q.7 D/E = 0.8033 D/(D+E) = 0.8033/(1+0.8033) E/(D+E) = 1/(0.8033 + 1)

correction Q4. PMT = -40 if you take FV = -1000 alt you can take PV = -900 and FV = 1000 and PMT = 40

why does EQ get 1 here? How do you decide that? I was originally thinking D = .8033 and E =(1-.8033)? Q.7 D/E = 0.8033 D/(D+E) = 0.8033/(1+0.8033) E/(D+E) = 1/(0.8033 + 1)

This is the D/E ratio that is given as 0.8033 So given D/E = 0.8033 = 0.8033/1 So 1+D/E = 1.8033 (D+E)/E = 1.8033 or E/(E+D) = 1/1.8033 = .5545 So D/(E+D) = 1 - .5545 = .4455 CP

when you do E = 1- 0.8033 that means debt is 0.8033 or 80.33% of the total capital while the debt-to -equity ratio is the ratio of total debt to total equity ::: D/E !