Question

2- Hartman Motors has $14 million in assets, which were financed with $4.2 million of debt and $9.8 million in equity. Hartman's beta is currently 1.65, and its tax rate is 35%. Use the Hamada equation to find Hartman's unlevered beta, bU. Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

The Hamada Equation is

Where L = Levered Beta

U = Unlevered Beta

T = Tax Rate

D/E = Debt to Equity Ratio

Now we have D = $4.2 million (we will not convert the figures in formula to its full form because the answer will be same even if we use 4/2 instead of 4,200,000 as both the figures are in millions

E = $9.8 million

T = 35% or 0.35

L = 1.65

Plugging the values in the equations we get

1.65 = U (1+(0.65)*(4.2/9.8))

1.65 = U(1+ 0.4285714286)

U = 1.65/1.4285714286

U = 1.155