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Macrosoft Corp is planning to issue debt and use the proceeds to repurchase stocks. This is expected to decrease its debt to equity ratio from 80% to 50%. Its beta is currently 1.2 and the tax bracket is 21%. What will be its beta after the restructuring of the balance sheet? a 1.674 b 0.75 c 1.074 d 1.026 e 1.4

User Aemaem
by
8.9k points

1 Answer

1 vote

Answer:

To determine the beta after the restructuring of Macrosoft Corp's balance sheet, we can use the following formula:

new

=

Beta

old

×

(

1

+

Tax Rate

)

×

(

Debt-to-Equity Ratio

new

)

1

+

Tax Rate

×

(

Debt-to-Equity Ratio

new

Debt-to-Equity Ratio

old

)

β

new

=

1+Tax Rate×(Debt-to-Equity Ratio

new

−Debt-to-Equity Ratio

old

)

Beta

old

×(1+Tax Rate)×(Debt-to-Equity Ratio

new

)

Given the information:

Beta (old) = 1.2

Debt-to-Equity Ratio (old) = 80% or 0.8

Debt-to-Equity Ratio (new) = 50% or 0.5

Tax Rate = 21%

Let's substitute these values into the formula to calculate the new beta:

new

=

1.2

×

(

1

+

0.21

)

×

0.5

1

+

0.21

×

(

0.5

0.8

)

β

new

=

1+0.21×(0.5−0.8)

1.2×(1+0.21)×0.5

new

=

1.2

×

1.21

×

0.5

1

+

0.21

×

(

0.3

)

β

new

=

1+0.21×(−0.3)

1.2×1.21×0.5

new

=

0.726

1

0.063

β

new

=

1−0.063

0.726

new

=

0.726

0.937

β

new

=

0.937

0.726

new

0.7752

β

new

≈0.7752

Rounding the new beta to two decimal places, we find that the beta after the restructuring of the balance sheet for Macrosoft Corp is approximately 0.78.

Therefore, the correct option is b) 0.75.

Step-by-step explanation:

User Yogeesh H T
by
8.3k points
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