WACC vs this other equation

CFA Level II
#1

I’m confused as to when to use the re = ro + (ro - rd) * (1 - tax rate) * (D/E) vs the WACC equation? Are these the same equation rewritten?

#2

There are 2 steps to calculate WACC when you move away from 100% equity capital structure.

The first formula gives you the cost of levered equity from unlevered equity (as you start using debt in your capital structure, your cost of equity will INCREASE ). So the Re means it’s levered, and Ro means the cost of unlevered equity (if you are using 100% equity).

Then you use the WACC equation to calculate the WACC using cost of pretax debt and LEVERED cost of equity.

#3

Thanks cgy5478, that actually was really helpful. Is there anywhere where they derive the levering equation somewhere?

#4

It’s in the Modigliani and Miller section