Question

Levered beta= .49

Unlevered Beta= .17

Explain how your company capital structure (leverage) has impacted the risk of the company.

Answer 1

Levered beta= Unlevered beta*[1+ (1-t)* Debt/Equity] ; t=taxrate

From the formula we can see that if the debt=0 for a company, the levered beta will be same as unlevered beta.

But because of the present of debt in capital structure the levered beta is increasing for the company. Here the levered beta is .49 which is high riskier than a stock without any debt in its capital structure. ( Higher beta higher risk for the company)

Considering no tax we can calculate the debt/equity ratio from the equation as shown.

1+Debt/equity= levered beta/unlevered beta = .49/.17 =2.882

Debt/Equity= 1.882 ; without tax consideration the capital structure has a debt/ equity ratio of 1.882 which is considered as high risk.