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Question of the Week - Corporate Finance
Ated Technology's debt/equity ratio is 70%, and the company wants to maintain that ratio. When calculating the weighted average cost of capital, the weight given to the cost of equity (w_e) is closest to:
Question of the Week - Corporate Finance 34 votes
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One way to calculate this is to adjust the debt weighting formula:
w_e = E / (D + E) = E/E / (D/E + E/E) = 1 / (0.7 + 1) = 0.59
Sometimes the easiest way to solve problems like this is to put in fake numbers. If D/E = 0.7, then we could set D = 7 and E = 10. The equity weight would then be 10 / (10 + 7) = 0.59.