Question

You decided that it's time to invest some money into the stock market. You bought a portfolio with the following characteristics: "Walt Disney" stock "Target" stock Price per share ($) 132 84 Number of shares purchased 10 15 The weight of Target’s stock in your portfolio is ____________ %. (Increase decimal places for any intermediate calculations, from the default 2 to 6 or higher. Only round your final answer to TWO decimal places: for example, 10.23.)

A company faces a 40% corporate income tax rate. It has debt and equity in its capital structure, with the following characteristics: Equity Debt 15,000 shares 1,000 bonds $70 current price per share $920 current bond value 9% cost of equity 5% pre-tax cost of debt Calculate the following. (Percent, not decimals! Increase decimal places for any intermediate calculations, from the default 2 to 6 or higher. Only round your final answer to TWO decimal places: for example, 12.34.)
The weight of equity is _________%.
The weight of debt is _________%.

Answer 1

1. The weight of Target’s stock in your portfolio = Market value of Target stock/(Market value of Walt Disney stock + Market value of Target stock)

Market value of Target stock = price per share*no. of shares purchased = $132*10 = $1,320

Market value of Walt Disney stock = price per share*no. of shares purchased = $84*15 = $1,260

The weight of Target’s stock in your portfolio = $1,320/($1,320 + $1,260) = $1,320/$2,580‬ = 0.5116 or 51.16%

2. Weight of equity = market value of equity/total capital

Weight of debt = market value of debt/total capital

market value of equity = current price per share*no. of shares = $70*15,000 = $1,050,000‬

market value of debt = current bond value*no. of bonds = $920*1,000 = $920,000‬

total capital = market value of equity + market value of debt = $1,050,000‬ + $920,000‬ = $1,970,000‬

Weight of equity = $1,050,000‬/$1,970,000‬ = 0.5330 or 53.30%

Weight of debt = $920,000‬/$1,970,000‬ = 0.4670 or 46.70%