Question

Unlevered Beta Counts Accounting has a beta of 1.25. The tax rate is 40%, and Counts is financed with 55% debt. What is Counts' unlevered beta? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

The unlevered beta for Counts Accounting is calculated using the formula involving its levered beta, debt to equity ratio, and the tax rate. After substituting the provided values and calculating, the unlevered beta, rounded to two decimal places, is determined to be 0.72.

Step-by-step explanation:

The student has asked to calculate the unlevered beta for Counts Accounting, which has a levered beta of 1.25. The tax rate is provided as 40%, and the company is financed with 55% debt. To find the unlevered beta, we use the formula: Unlevered Beta = Levered Beta / (1 + (1 - tax rate) * (Debt/Equity)).

First, calculate the equity portion which is the remaining part of the 100%, meaning 45% equity (since 100% - 55% debt = 45% equity).

Then, calculate the unlevered beta using the formula:

Unlevered Beta = 1.25 / (1 + (1 - 0.40) * (0.55 / 0.45))

After the calculation, assuming no rounding errors, the unlevered beta would be:

Unlevered Beta = 1.25 / (1 + (0.60) * (1.2222)) = 1.25 / 1.7333 = 0.7207

Therefore, the unlevered beta for Counts Accounting, rounded to two decimal places, is 0.72.