Question

The beta of an all equity firm is 2.3. If the firm changes its capital structure to 50% debt and 50% equity using 8% debt financing, what will be the equity beta of the levered firm

Answer 1

The beta of an all equity firm is 2.3. If the firm changes its capital structure to 50% debt and 50% equity using 8% debt financing, what will be the equity beta of the levered firm? The beta of debt is 0.2. (Assume no taxes.) Provide your answer with 2 digits after the comma.

Answer:

4.40

Explanation:

Equity beta, is a term in business or economics, which is.oftemr referred to as Levered beta, which measures the risk of a firm in respect to debt and equity in its capital structure to the volatility of the stock market.

Therefore, Formula for equity beta is giving as = βE = equity firm + (debt/equity)(equity firm - beta of debt)

Given that, equity firm = 2.3

Capital structure to debt = 50% = 0.5

Capital structure to equity = 50% = 0.5

Beta of debt = 0.2

βE = 2.3 + (0.5/0.5)(2.3 - 0.2) =

2.3 + (0.5/0.5)(2.3 - 02) =

= 2.3 + (1)(2.1)=

2.3 + 2.1= 4.40

Hence, the final is 4.40