Question

Hartman Motors has $10 million in assets, which were financed with $5 million of debt and $5 million in equity. Hartman's beta is currently 1.9, and its tax rate is 20%. Use the Hamada equation to find Hartman's unlevered beta, bU. Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Answer: 1.06

Step-by-step explanation:

From Hamada equation:

`\beta U=(\beta L)/([1+(1-T)*((D)/(E)) ])`

where:

`\beta L` is the levered beta (the company's current beta)

T is the corporate tax rate

D is the value of debt

E is the value of equity

Plugging in the values from the problem:

`\beta U=(1.9)/([1+(1-0.2)*(5)/(5) ])`

`\beta U = (1.9)/(1.8)`

`\beta U=1.06`