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Can anyone kindly explain how the debt to equity is calculated when calculating WACC?
In the EVA question from June 2014:
The debt to equity ratio is stated as 30.0%. I assumed this to mean 30% debt and 70% equity, and therefore calculated the WACC as follows:
(Cost of Equity x 70%) + (Post tax cost of Debt x 30%)
However the examiner’s answer is as follows:
(Cost of Equity x 1/1.3) + (Post tax cost of Debt x 0.3/1.3)
Where am I going wrong?
D/E of 30% means 30/100: D/E
Hence, total capital is 30 + 100 and the weightings are 30/130 and 100/130
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