Question

. El Capitan Foods has a capital structure of 36% debt and 64% equity, its tax rate is 35%, and its beta (leveraged) is 1.4. Based on the Hamada equation, what would the firm’s beta if it used no debt, i.e. what is its unleveraged beta?

Answer 1

Answer:

The firm's unleveraged beta is 1.0251

Explanation:

Hamada's equation  is used to separate the financial risk of a levered firm from its business risk.

The Hamada equation:

Bu= Bl/(1 + (1 − T)(D/E))

Bl = 1.4

wd = 0.36

Tax rate = 35%

D/E = wd / (1 – wd) = 0.5625 = 56.25%

= 1.4/ (1+(1-0.35)(0.5625))

=1.4/ 1 + (0.65)(0.5625)

=1.4/1.36

= 1.0251