Question

If a firm has $10 million of debt with a debt beta of .4 and $30 million of equity with equity beta of 2, then the firm's asset beta is ____.

a) 0.8
b) 1.2
c) 1.6
d) 2.0

Answer 1

The firm's asset beta can be calculated using the debt beta and equity beta, and the firm's debt and equity values. In this case, the firm's asset beta is 1.6.

Step-by-step explanation:

The asset beta of a firm can be calculated using the formula:

Asset Beta = (Debt / (Debt + Equity)) * Debt Beta + (Equity / (Debt + Equity)) * Equity Beta

Given the information provided, the firm's total debt is $10 million and its total equity is $30 million. Therefore, the total value of the firm's assets is $40 million ($10 million + $30 million). Plugging these values into the formula:

Asset Beta = (10 / 40) * 0.4 + (30 / 40) * 2

Asset Beta = 0.25 * 0.4 + 0.75 * 2

Asset Beta = 0.1 + 1.5

Asset Beta = 1.6

Therefore, the firm's asset beta is 1.6. The correct answer is c) 1.6.