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5 April, 12:45

The Free-Float Company, a company in the 36% tax bracket, has riskless debt in its capital structure which makes up 40% of the total capital structure, and equity is the other 60%. The beta of the assets for this business is. 8 and the equity beta is:

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  1. 5 April, 14:40
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    This question is asking for unlevered beta given the levered beta;

    Levered beta = Unlevered beta[ 1 + (1-tax) * D/E]

    Levered beta = 0.8

    tax = 36%

    D/E = 0.40 / 0.60 = 0.6667

    Next, plug in the numbers to the formula;

    0.8 = Unlevered beta [ 1 + (1-0.36) * 0.6667]

    0.8 = Unlevered beta [1.426688]

    Divide both sides by 1.426688 to solve for unlevered beta;

    0.8 / 1.426688 = Unlevered beta

    0.56 = Unlevered beta; this is the beta without debt, hence the equity beta.
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