Hello, Can someone tell me where this formula comes from please?
http://i58.tinypic.com/2v8oeq0.jpg I checked in the book but I cannot find it.(1+ (%debt/%equity))* equity portion. Or at least where is this formula derived from? Thx a lot
I haven’t seen this question, but all it’s asking is to solve for Total Capital
You know that: Total Capital = Debt + Equity
and you know:
Equity = 10.25;
Debt/Equity = 0.5/0.5
So, I don’t think there’s a specfic formula for this, you just have to understand what the question is asking (half the challenge!) and you can figure out the math from there in a fairly straightforward way.
[1 + (%debt/%equity)] × equity portion
= [(%equity/%equity) + (%debt/%equity)] × equity portion
= [(%equity + %debt)/%equity] × equity portion
= equity + debt
For example, if you finance a project with 80% debt and 20% equity, then if you raise €10m in equity, you’ll raise €40m in debt, for a total of €50m:
[1 + (%debt/%equity)] × equity portion
= [1 + (80%/20%)] × €10m
= (1 + 4) × €10m
= €50m.
OK guys I got it thanks to you too. Yeah I was not understanding the quesiton properly. Now It makes more sense. It is like using a rule of three.
My pleasure.