debt to equity ratios

If is given as 70%:30% is means that equity is 70% of equity + debt, and that debt is 30% of equity + debt.

If it is given as 2:1 it means that equity is 2/(2+1) or 2/3 of equity + debt, and that debt is 1/3 of equity + debt.

What calculating the WACC, you for each sources of finance you weight by the MV of that source of finance divided by the total. (So if there was only equity and debt, you would use weightings of 70% and 30% in the first example, and weightings of 2/3 and 1/3 in the second example.

However you really should not be relying on simply using the formula on the formula sheet – firstly because there can easily be more than 2 sources of finance (for example: equity, preference shares, and debt; or equity, traded debt and bank loan); secondly you do not use the formula as it stands when there is redeemable debt (which is common in the exam); and thirdly you should learn the idea of weighting the costs anyway without wasting time having to look at the formula.

All of this is explained in my free lectures on the calculation of the cost of capital.

You are welcome 🙂