LOS 31 J - I am calculating the WACC. Schweser says X’s “target debt-to-equity ratio is .25”
Does this mean that debt is 25% and equity is 75%? The book says Debt is 20% and equity is 80%. IS this an error? IF not whats an efficient way to learn how to convert ratios to percents
No, since it is a debt to equity ratio you need to use equity as the denominator. For example, if you have $1mm of equity you would have $250k of debt, which is 25% of equity
Total capital (debt snd equity) is $1.25mm so the $1mm of equity is 80% of this figure and debt is 20%.
This is how I think of it: If the D-E ratio is .25, then for every $.25 of debt there is $1 of equity. Assuming $125 in total capital structure, debt = $25 and equity = $100. Then, %D = $25 / ($25 + $100) = 20% and %E = 1 - %D = 80%.
Thank you both. I understand it now.