Question

The beta of an all-equity firm is 1.4. Suppose the firm changes its capital structure to 40 percent debt and 60 percent equity. What is the equity beta of the levered firm

Answer 1

1.59

Step-by-step explanation:

The formula required to calculate the equity beta of the levered beta is given below:

Levered Beta=Unlevered Beta*((1+(1-tax rate)*(debt/equity))

unlevered bera=1.4

tax rate (assume it is 30%) is 0.30

debt is 40% or 0.40

equity is 60% or 0.60

Levered Beta=1.4((1+(1-0.30)*(0.40/0.60))

levered Beta=1.4*(1+0.7)*0.666666667

levered beta=1.4*1.133333334

levered beta= 1.59

You can recompute using the missing actual tax rate