You own a stock portfolio invested 35 percent in Stock Q, 25 percent in Stock R,
ID: 2624498 • Letter: Y
Question
You own a stock portfolio invested 35 percent in Stock Q, 25 percent in Stock R, 25 percent in Stock S, and 15 percent in Stock T. The betas for these four stocks are 0.83, 1.21, 1.22, and 1.39, respectively. What is the portfolio beta? (Round your answer to 2 decimal places. (e.g., 32.16))
Sixx AM Manufacturing has a target debt?equity ratio of 0.65. Its cost of equity is 13 percent, and its cost of debt is 9 percent. If the tax rate is 40 percent, what is the company
You own a stock portfolio invested 35 percent in Stock Q, 25 percent in Stock R, 25 percent in Stock S, and 15 percent in Stock T. The betas for these four stocks are 0.83, 1.21, 1.22, and 1.39, respectively. What is the portfolio beta? (Round your answer to 2 decimal places. (e.g., 32.16))
Explanation / Answer
Solution 1
Solution 2
After tax cost of debt = 0.09 x (1 - 0.40)
= 0.054 or 5.40%
Debt equity ratio = 0.65 / 1
Weight if debt = 0.65 / 1.65 = 0.3939 or 39.39%
Weight of equity = 1 / 1.65 = 0.6061 or 60.61%
WACC = WEKE + WDKD
= (0.6061 x 0.13) + (0.3939 x 0.054)
= 0.078793 + 0.0212706
= 0.1000636 or 10.01% (Answer)
Solution 3
Portfolio beta should be equal to one, as the beta of market is one already.
Therefore, the weighted betas of the portfoile should be equal to total investment, i.e. $2,400,000
Weighted beta of Stock A = $360,000 x 1 = $360,000
Weighted beta of Stock B = $624,000 x 1.1 = $686,400
Weighted beta of Risk free asset will be 0
Remaining weight for Stock C = 2400000 - 360000 - 686400
= 1353600
Investment in stock C = Weighted beta of stock C / Beta of Stock C
= 1353600 / 1.20
= $1,128,000
Remaining investment in risk free asset = 2400000 - 360000 - 624000 - 1128000
= $288,000
Schedule will look like this:
Portfolio Beta Calculation Stock Name Percentage Beta Weighted Beta Stock Q 0.35 0.83 0.29 Stock R 0.25 1.21 0.30 Stock S 0.25 1.22 0.31 Stock T 0.15 1.39 0.21 Portfolio Beta 1.11 (Answer)Related Questions
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