Question

The Boat Company has a capital structure of 30 percent riskless debt and 70 percent equity. The assumed tax rate is 23 percent. If the asset beta is .9, what is the equity beta?

Answer 1

Answer: 0.68

Explanation:

Using the measures given, the equity beta can be calculated as:

Equity beta = Asset beta * (1 + (1 - Tax rate) * (Debt/Equity)

= 0.9 * ( 1 + ( 1 - 23%) * (30% / 70%)

= 1.593 * 0.3/0.7

= 0.68