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Vladimir79 [104]
3 years ago
7

If a firm has a levered beta of .9 and a debt to equity ratio of 1, what is the unlevered beta assuming a tax rate of 30%? (Roun

d to the nearest hundredth)
Business
1 answer:
Ilia_Sergeevich [38]3 years ago
5 0

Answer:

Unlevered beta = 0.53

Explanation:

<em>Beta is a measure of systematic risk. Systematic risk is further divided into business and financial.</em>

<em>Business risk and financial risk. Business risk is that associated with the nature of the business operations that causes variability in the operating income of the business.</em>

This is measured by the unlevered beta where the company has no debt finance.

Financial risk, on the other hand, is associated with use of debt finance . A company that uses a form of debt would face such risk . The systematic risk of such business would be measured using the levered beta.

The formula below shows the relationship:

βa = βe ×  Ve/ (Ve + Vd(1-T) )

βa -Unlevered beta

βe - Levered beta

Ve- Equity weight

Vd- Debt weight

T- Tax rate

DATA

βe- 0.9

βa- ?

Ve-  1

Vd- 1

T- 0.3

βa = 0.9 ×  1/(1 + 1×(1-0.3)=0.529

βa - 0.53

Unlevered beta = 0.53

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6 0
2 years ago
41.
dsp73

a) ( 0.8509718, 0.8890282)

b) ( 0.7255, 0.7745)

Explanation:

(a)

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