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WACC for EVA June 2014 Q1

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA APM Exams › WACC for EVA June 2014 Q1

  • This topic has 2 replies, 2 voices, and was last updated 9 years ago by chirag1881.
Viewing 3 posts - 1 through 3 (of 3 total)
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    Posts
  • March 4, 2016 at 4:57 pm #303447
    chirag1881
    Participant
    • Topics: 3
    • Replies: 8
    • ☆

    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?

    March 5, 2016 at 11:16 am #303578
    Ken Garrett
    Keymaster
    • Topics: 10
    • Replies: 10594
    • ☆☆☆☆☆

    D/E of 30% means 30/100: D/E

    Hence, total capital is 30 + 100 and the weightings are 30/130 and 100/130

    March 5, 2016 at 8:25 pm #303692
    chirag1881
    Participant
    • Topics: 3
    • Replies: 8
    • ☆

    Great, I understand it now!

    Thank you very much Gromit.

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