A firm has a debt-equity ratio of.25. What weight should be given to the equity for the WACC computation?

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Quizplus · Accepted Answer

The weight given to equity in the WACC computation can be found by understanding that the debt-equity ratio represents the proportion of debt to equity financing. A ratio of .25 means that for every $1 of equity, there is $0.25 of debt. To find the weights, we convert this relationship into a fraction of the total financing. If equity is $1 and debt is $0.25, the total financing is $1.25. The weight of equity is therefore $1 / $1.25 = 0.8 or 80%.

A Firm Has a Debt-Equity Ratio Of