Question

Hartman Motors has $18 million in assets, which were financed with $6 million of debt and $12 million in equity. Hartman’s beta is currently 1.3, and its tax rate is 35%. Use the Hamada equation to find Hartman’s unlevered beta, .

Answer 1

Answer:

0.9811

Step-by-step explanation:

Hartman Motors' data:

Debt (D) = $6 million

Equity (E) = $12 million

Tax rate (T) = 0.35

Levered beta (βL) = 1.3

According to the Hamada equation:

$\beta_L =\beta_U[1+(1-T)\frac{D}{E}]$

Applying the given data:

$1.3 =\beta_U[1+(1-0.35)\frac{6}{12}]\\\beta_U=0.9811$

Hartman’s unlevered beta is 0.9811.