In the Barksdale’s case, risk management for inviduals, the question asks for the target equity allocation.
Existing capital:
|Cash and investments|900,000|
|Adrian: Life insurance|100,000|
|Total capital available|1,000,000|
Human capital: 2.9M (35% is equity like).
I almost got the correct answer, except that I included the Life insurance (100k) in my calculation of the financial capital.
Why is the life insurance excluded from the ‘Financial Capital’?
The equity allocation of the Barksdale’s financial capital is calculated as follows:
Total economic wealth = Human capital + Financial capital = 2,900,000 + 900,000 = $3,800,000.
Target equity allocation of total economic wealth = $3,800,000 × 40% = $1,520,000
Human capital equity allocation = $2,900,000 × 35% = $1,015,000
Financial capital equity allocation = $1,520,000 – $1,015,000 = $505,000
% Financial capital equity allocation = Financial equity allocation/Total financial capital
= $505,000/$900,000
= 0.5611, or 56.1%