Wacc weighting wrong?

CFA Level I
#1

A firm with a marginal tax rate of 40% has a weighted average cost of capital of 7.11%. The before-tax cost of debt is 6%, and the cost of equity is 9%. The weight of equity in the firm’s capital structure is closest to:

  1. A.37%.
  2. B.65%.
  3. C.79%.
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Correct is B but why iare they removing wdrd in the equation?
Shouldn’t it be:
wacc=wdrd(1-t)+were
0,0711=0,036wd+0,09we
Not really sure how they can just remove the weight for debt?

#2

w_d+w_e=1 so w_d=1-w_e

1 Like
#3

Yes I know that but I’m not following the algebra here. Can you please explain or show the next step why it isen’t as I’ve done it?

#4

In your equation
0,0711=0,036wd+0,09we
replace wd by 1-we so
0,0711=0,036wd+0,09we=0,036(1-we)+0,09we=0,036+0,054w_e
0,035=0,054w_e
w_e=0,035/0,054=0,648

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#5

Makes perfect sense now, thanks!