Answer:
After the proposed financing and repurchase of equity, the weight in equity is 0.17 and the weight in debt is 0.83.
Step-by-step explanation:
Weight in equity refers to the proportion of contribution of equity to the total capital of the company. It is the ratio of the company’s equity market value to the addition of the equity and debt market values.
On the other hand, weight in debt is the proportion of contribution of debt to the total capital of the company. It is the ratio of the company’s debt market value to the addition of the equity and debt market values.
From the question, the sales of $250,000 debt and use of its proceeds to purchase outstanding equity reduce equity market value from $300,000 to $50,000 (i.e. $300,000 equity – 250,000 debt = $50,000 equity). However, the addition of the equity and debt market values still remains at $300,000 (i.e. 250,000 debt + $50,000 equity = $300,000 total equity and debt market values).
Based the above explanation, we have:
Weight in equity = $50,000/$300,000 = 0.17
Weight in equity = $250,000/$300,000 = 0.83
Therefore, after the proposed financing and repurchase of equity, the weight in equity is 0.17 and the weight in debt is 0.83.