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Basic Question 3 of 14
A firm has a debt-to-equity ratio of .50. Its cost of debt is 12%. Its overall cost of capital is 14%. What is its cost of equity if there are no taxes or other additional costs?
B. 16%
C. 15%
A. 13%
B. 16%
C. 15%
User Contributed Comments 25
| User | Comment |
|---|---|
| kalps | The answer is wrong, where have they got 1/3 from - this is meant to be weighting which is given as 1/2 in the question the correct answer is B. |
| tinku | D/E is 1/2 ; D/V=1/3 |
| gjwhite | (debt/equity)=1/2, therefore there is twice as much equity as debt: Ws = 2Wd and if we assume that Wps=0 (no preferred stock) then we have: Wd + 2Wd = 1 => Wd=1/3. |
| LogicMan | so I assume the answer is correct. |
| morpheus918 | Yes, it is correct. |
| Will1868 | I read the debt/equity ratio as .5 or 50% Debt 50% Equity in the capital strucure.??? Where does 1/3 come from? |
| rockeR | Debt/equit=0.5, assume Debt is $100 then equity should be $200 becoz the ratio is 0.5 Now, we know the V(E+D)=300 therefore, 12%*(100/300)+Re*(200/300)=14% Hence, Re should be 15% It does not matter what you assume for the debt value |
| evica | Why 1/3 to 2/3 when D/E ratio is 0.5? Shouldn't it be 1/2? |
| db28luke | The answer is correct. I got it wrong at first. |
| sarath | This one tricked me...but then 15 is the correct answer.. |
| tagr | debt/equity = 0.5 = 1/2, so debt = 1, equity = 2 total capital = debt + equity = 1 + 2 = 3 debt = 1/3 of total capital equity = 2/3 of total capital debt/equity = (1/3)/(2/3) = 1/2 = 0.5 |
| surob | easy question: D/E - 0.5 not D/Total capital |
| rivers | thank you tagr |
| DonAnd | Here goes:- D/E=0.5 =>weight of debt is D/E/(1+D/E)=1/3 =>weight of equity = 2/3 use the WACC formula and you get your answer |
| erinelize | This is a tricky question. I got it wrong because I assumed the weight was 50% debt and 50% equity but the ratio debt/equity is .50. Be sure to read the questions carefully! |
| shiva5555 | What about taxes? Is this already figured into cost of debt? |
| hoyleng | shiva : this question ignored taxes. |
| Skrills | this "kalps" character needs to give up. seems like they post a dumb comment on every other question |
| moneyguy | .14 = (.33)(.12) + (.67)(X) X = .1499 |
| johntan1979 | Answer is correct. D/E = 0.5, so D = 1/2 E D and E ==> 3 parts Weightage is correct ==> 1/3 D + 2/3 E |
| J0rdanl | D/E = .5 so .5 debt for every 1.00 of equity. solve for weights: Wd: .5/(.5+1.00) We: 1.00/(.5+1.00) this is where the 1/3 and 2/3 come from |
| vish251090 | D/E = .5 ( .5/1 = .5) total capital is .5(debt) + 1(equity) =1.5 weight of D = .5/1.5 weight of E =1/1.5 |
| khalifa92 | easy beasy 14 = 1/3*0.12 + 2/3x 14 = 4 + 2/3x 14 - 4 = 2/3x 10 = 2/3x 10*2/3 = x 15 = x |
| khalifa92 | 10*3/2 = x 15 = X |
| pigletin | this is a math problem |
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Learning Outcome Statements
calculate and interpret the weighted average cost of capital (WACC) of a company;
describe how taxes affect the cost of capital from different capital sources;
CFA® 2024 Level I Curriculum, Volume 4, Module 33.