Hi all, I have a question that involves WACC. It states that the Debt-To-Equity Ratio is 50%. So for that would you imply that it is 1/2 (33%debt and 66% equity) or that it is 50% each. I assumed the former. However in the question in Schweser practice question, the answer uses 50% each. Am I wrong or are they?! Thanks all

33/66 is 1/2. However 33% debt and 66 % equity equates to debt 1/3 and equity 2/3. 33% is 33/100. Hope this helps.

But what I am saying is they worded it 50 % Debt to equity… so do i use 50% weightings for each or 33 and 66?

because 50% = 1/2 … 1 debt 2 equity… 3 total… 1/3 = debt 2/3 = equity…thats my take but they told me i was wrongi n the answer section!

50% for each. BTW, 1/2 does not equate to 1/3 and 2 /3. Please be careful.

if D/E = 0.5, I would say Wd = 0.5/1+0.5 = 0.33 for my debts but i understand that usually the D/E ratio is not a percentage, so quite confusing to have it stated as 50%. How do they allocate the weight then ? 0.5 each ?

If D/E =0.5 then: wd = 0.5/(0.5+1)=0.33 we = 1/(0.5+1)=0.67 It says it explicitly on page 43 of vol4 curriculum, and in example 3 on page 45. So either you’re not reading it properly, or there is a mistake

The probably states : An Analyst gathers the following information about Twist, INC. : - The company’s target debt to equity ratio is 50% I will spare you the rest of the problem. When you look at the answer in the back, it shows you it uses a weight of 50% for equity and 50% for debt. I used the 66% and 33% and of course my answer was incorrect…

anyoneee

I just saw this on a mock and need to know as well because I also solved it assuming 33% debt 67% equity.

I saw this as well… I am sure this is an incorrect interpretation on Schweser’s side.

My understanding is that the 50% is a computed value. It is already given and thus you must consider this as the weight. As Miss Yiota said, normally you will have to calculate this value and in that case you would use the formula and based on your calcs you would get 33% and 67% as wd and we. This could be a trip up question. JRossSter and Johnnybuzz - Was one of the answers based upon your calc of 33% and 67%.? There is an example in vol 4 page 41 which gives the capital structure as % and the solution uses these directly.

I just emailed schweser…this doesnt seem right. 50% debt to equity is 1/2. It doesnt state the weighting of debt is 50%… does anyone know for sure?

My apologies to all. I guess I have not been reading well. I was reading this as target debt 50%… and thus my responses. All withdrawn with O & E duly noted!!

No worries C3… lol is schweser wrong!!! ugh im racking my brain here

The schweser is definitely correct on this one. They are not giving you target weightings or capital structure. They are giving you a ratio of d/e. I worked this problem as well. You have to calculate out the percentages based on the 0.5 d/e ratio which brings you to 33/67.

Amy… they are NOT correct on it. You did it correctly yourself but may have misunderstood the initial discussion? 33/67 is RIGHT, but schweser was saying use 50/50 in the answer. Schweser did get back to me andl et me know this was incorrect on their part…