Question

Hairston Industries has $5 million of debt and $20 million of equity. If Hairston's beta is currently 1.75 and its tax rate is 40%, what is its unlevered beta, bU?

Answer 1

Answer:

The un levered beta ( bu) of the company is 1.52

Explanation:

Given information -

Equity  (E) - $20 million

Debt (D) - $5 million

Beta ( levered ) - 1.75

Tax rate ( T ) = 40%

D / E ( Debt to Equity ratio ) = $ 5 million / $20 million = .25

Formula for taking out un levered beta ( bu) is -

Beta levered ( bl ) = Beta un levered ( bu ) [1 + (1 - T ) D / E ]

1.75 = bu [1 + (1 - 40% ) .25

1.75 = bu [1 + .6 x .25 ]

1.75 = bu [ 1 + .15 ]

1.75 = bu [ 1.15 ]

bu = 1.75 / 1.15

bu = 1.52