Question

Gener Motors (GM) has an unlevered equity beta of 0.56 and the debt beta for a...

  1. Gener Motors (GM) has an unlevered equity beta of 0.56 and the debt beta for a BBB credit is 0.24. We also know that GM's CFO likes to keep the debt to value ratio at 1/3. We also know that the risk free rate on a T bill is 2% while the market expected return is 12%. Based on this information, please estimate the levered equity beta and the Expected return for GM stock.

    0.72; 9.20%

    1.0; 12.00%

    1.20; 14.0%

    0.80; 10.0%
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Answer #1

Unlevered equity beta, ul = 0.56

Debt to value = 1/3 ie D/E = 1/2=  0.5

e = ul + (ul - debt) *(1+ D/E)

= 0.56 + (0.56-0.24)* 1.5 = 1.04

Expected return = Risk free rate + e *(Market return - Risk free rate) = 2% + 1.04*(12% -2%) = 2% + 10.04% = 12.04%

Answer is 1.0; 12.00%

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