WACC walkthrough

[trek7000]

For some reason my mind blanks on how to figure out WACC when certain items are given.
I know WACC = We*Re+(Wd*Rd(1-Tax Rate))
there is no preferred.
OK a firm has a debt to equity ratio of .35. Shareholders expect a return of 10% and the before tax return on debt is 8%. Tax rate is 40%. What is the WACC?
I have seen this doen with simple d/e ratios like .25, but just can’t make the leap to complicated numbers.
Is this right:
1/.35=2.86 so $1 debt = $2.86 equity.
1/3.86 = .259 debt weight
2.86/3.86 = .741 equity weight
=.741*.10+(.259*.08(1-.4))
=.074+.012
=.086
8.6%

 

[mike0021]

i agree, i do it a similar way, a little different though
$0.35 of debt for every $1 equity
so debt is 0.35/1.35 = .26
so .26*(.08(1-.4)) + .74 * .10
same idea just less calculations for me

 

[ruhi22]

^^ agree with mike. this is how i do it too- less time consuming.

 

[Red]

Yes. I do it the way Mike0021 does it, but use whatever works best for you.

 

[trek7000]

I knew there had to be a different way of thinking of it, I am glad I asked, Mike’s way is much faster….Thank you for the tip.

 

[mike0021]

just make sure you dont do .35 debt, .65 equity! common mistake when you are in a rush!

 

[malnoll]

1+D/E = Equity multiplier, which is part of dupont equation. You get alot more understanding when hindsight simplicity like this is finally seen. It took me forever to figure this out, but learned alot more by understanding, rather than memorizing.