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30 August, 14:44

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?

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  1. 30 August, 14:57
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    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
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