Question

Company b has a levered beta of 1.10, its capital structure consists of 40% debt and 60% equity, and its tax rate is 25%. what would company's beta be if it used no debt, i.e., what is its unlevered beta?

a. 0.66
b. 0.52
c. 0.85
d. 0.73

Answer 1

The unlevered beta of the company is 0.73. Therefore, the correct option is D.

Step-by-step explanation:

To calculate the unlevered beta, we need to use the formula:

Unlevered Beta = Levered Beta / (1 + (1 - Tax Rate) * Debt/Equity)

Given that the levered beta is 1.10, the tax rate is 25%, and the capital structure consists of 40% debt and 60% equity, we can substitute these values into the formula:

Unlevered Beta = 1.10 / (1 + (1 - 0.25) * 0.40/0.60) = 0.73

Therefore, the company's unlevered beta would be 0.73, which corresponds to option d.