Homework Answers
Answer a.
Market Value of Portfolio = Market Value of Debt + Market Value
of Preferred Stock + Market Value of Common Stock
Market Value of Portfolio = $103 million + $43 million + $302
million
Market Value of Portfolio = $448 million
Weight of Debt = Market Value of Debt / Market Value of
Portfolio
Weight of Debt = $103 million / $448 million
Weight of Debt = 0.22991
Weight of Preferred Stock = Market Value of Preferred Stock /
Market Value of Portfolio
Weight of Preferred Stock = $43 million / $448 million
Weight of Preferred Stock = 0.09598
Weight of Common Stock = Market Value of Common Stock / Market
Value of Portfolio
Weight of Common Stock = $302 million / $448 million
Weight of Common Stock = 0.67411
Asset Beta = Weight of Debt * Beta of Debt + Weight of Preferred
Stock * Beta of Preferred Stock + Weight of Common Stock * Beta of
Common Stock
Asset Beta = 0.22991 * 0.000 + 0.09598 * 0.230 + 0.67411 *
1.23
Asset Beta = 0.851
Answer b.
Discount Rate = Risk-free Rate + Asset Beta * Market Risk
Premium
Discount Rate = 4.00% + 0.851 * 5.00%
Discount Rate = 8.26%
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