If my DEBT to Equity ratio is .60 percent. What is the weighted cost of capital that goes to debt and what amount is equity. Also, how is it calculated?
Don't even have to do that much. No need to get a reciprocal. Debt/equity is .6 so there's .6 debt per 1 equity. So debt is .6/1+.6= .6/1.6= .375. Equity =1-.375=.675
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Comments
That means your debt + equity = 1 + 1.666* = 2.666*
So from that we can work out the relevant weightings for the WACC calculation as follows:
Debt = 1/2.666*= 0.375
Equity = 1.666*/2.666* = 0.625 or of course it can also be calculated as 1 - 0.375 = 0.625
where, D=Debt
E=Equity
t=tax rate
V=D+E
kd=cost of debt
ke=cost of equity