Finance School of management Debtco's Replicating Portfolio Let x be the fraction of the firm in the replication y be the borrowings at the risk-free rate in the replication The following equations must be satisfied 60=140x-104Y:0=70x-1.04Y→ x=;Y=$57692,308 uesTc
11 Finance School of Management Debtco’s Replicating Portfolio ❖ Let – x be the fraction of the firm in the replication – Y be the borrowings at the risk-free rate in the replication – The following equations must be satisfied ; $57,692,308 7 6 60 140 1.04 ; 0 70 1.04 = = = − = − x Y x Y x Y
Finance School of management Debtco's Replicating Portfolio (S000) Position Immediate Casea Case b 6/7 assets-85,714120,00060,000 Bond(RF)57,69260,00060,000 Total 28,02260,000 0 uesTc 12
12 Finance School of Management Debtco’s Replicating Portfolio ($’000) Position Immediate Case A Case B 6/7 assets -85,714 120,000 60,000 Bond (RF) 57,692 -60,000 -60,000 Total 28,022 60,000 0