Calc WACC using dividend discount model

[archived_user]

Can someone please explain this particular portion of the problem D/(D + E) = 0.8033/1.8033 = 0.445. given the following
Before-tax cost of new debt
8 percent
Tax rate
40 percent
Target debt-to-equity ratio
0.8033
Stock price
$30
Next year’s dividend
$1.50
Estimated growth rate
7 percent
Solution
CALC WACC
Cost of equity = D1/P0 + g = $1.50/$30 + 7% = 5% + 7% = 12%
D/(D + E) = 0.8033/1.8033 = 0.445
WACC = [(0.445) (0.08)(1 − 0.4)] + [(0.555)(0.12)] = 8.8%

 

[archived_user]

That portion is just the weight for Debt = 44.5%.
The weight for Equity portion is 1 - 0.445 = 55.5%
The total is 100%
Let’s say: Equity is 5 and Debt is 2
D/E ratio = 2/5 = 0.4/1
D+E = 7
Therefore, D/(D+E)
=> 0.4/1.4 = 28.57%
Or => D/(D+E) = 2/7 = 28.57%
Both are the same.

 

[archived_user]

Just remember:
D/(D+E) = D/(1+D/E) = 0,8033/(1 + 0,8033) = 0,4455 = 44,55%
To get the weight of debt, just divide the debt by (1+ D/E ratio)!
Regards,
Oscar