Question

You are going to value Lauryn’s Doll Co. using the FCF model. After consulting various sources, you find that Lauryn's has a reported equity beta of 1.5, a debt-to-equity ratio of 0.6, and a tax rate of 30 percent. Based on this information, what is the asset beta for Lauryn’s?

Answer 1

Given,

Equity beta = 1.5

Debt equity ratio = 0.6

Tax rate = 30% or 0.30

Solution :-

Asset beta = equity beta [1 + (1 - tax rate)(debt equity ratio)]

= 1.5 [1 + (1 - 0.30)(0.6)]

= 1.5 [1 + (0.70)(0.6)]

= 1.5 [1 + 0.42]

= 1.5 1.42 = 1.056

Thus, the asset beta for Lauryn's is 1.056