Question

A firm's assets have a beta of 0.60. The market value of the firm's equity is $1.2 billion and the market value of the firm's debt is $900 million. If the corporate tax rate = 0, what is the beta of the firm's equity?

Answer 1

Equity beta = Asset beta x (Debt value (1-tax) + Equity Value) / Equity value

Equity beta = 0.60 x (900 + 1200) / 1200 = 1.05

You can also think of this as

Asset Beta = weighted average of Equity beta and Debt beta

Asset Beta = [equity beta x Equity value + Debt beta x Debt value] / [Equity + Debt]

Debt beta is always zero.

Therefore,

Asset Beta = [equity beta x Equity value] / [Equity + Debt]

Therefore, Equity beta = Asset beta x (Debt value + Equity Value) / Equity value

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