Question

The regression beta for Disney is 0.546 and the average debt-to-equity ratio for the period was 31.78%. Calculate the un-levered beta and the effects of leverage (i.e., levered beta) on Disney’s beta should the debt-to-capital ratio change to 16.69% and 27.11%. Assume a marginal tax rate of 38.00%.

a. Calculate unlevered beta

b. calculate levered beta if debt to capital ratio is 16.69%

c. calculate levered bet if debt to capital ratio is 27.11%

Answer 1

Answer a.

Levered Beta = 0.546
D/E Ratio = 31.78%

Unlevered Beta = Levered Beta / [1 + (1-tax)*D/E]
Unlevered Beta = 0.546 / [1 + (1-0.38)*31.78%]
Unlevered Beta = 0.546 / 1.1970
Unlevered Beta = 0.456

Answer b.

Unlevered Beta = 0.456
D/C = 16.69%

D/E = (D/C) / [1 - D/C]
D/E = 0.1669 / (1 - 0.1669)
D/E = 0.2003

Levered Beta = Unlevered Beta * [1 + (1-tax)*D/E]
Levered Beta = 0.456 * [1 + (1-0.38)*0.2003]
Levered Beta = 0.456 * 1.1242
Levered Beta = 0.513

Answer c.

Unlevered Beta = 0.456
D/C = 27.11%

D/E = (D/C) / [1 - D/C]
D/E = 0.2711 / (1 - 0.2711)
D/E = 0.3719

Levered Beta = Unlevered Beta * [1 + (1-tax)*D/E]
Levered Beta = 0.456 * [1 + (1-0.38)*0.3719]
Levered Beta = 0.456 * 1.2306
Levered Beta = 0.561