Question

Given the information below on peer companies A-D, calculate the beta for company E if it has net debt/equity of 0.65 and a tax rate of 35%.

Company	Beta	Net debt / equity	tax rate
A	1.25	1.25	35%
B	1.45	1.65	35%
C	1.32	1.38	35%
D	1.08	1.03	35%

Answer 1

We need to calculate unlevered Beta first (or you can say assets' beta)

Unlevered beta = Levered Beta / [1+(1-tax) x D/E]

Company	Beta	Net debt / equity	tax rate	Unlevered beta
A	1.25	1.25	35%	0.690
B	1.45	1.65	35%	0.700
C	1.32	1.38	35%	0.696
D	1.08	1.03	35%	0.647

Average industry Beta (unlevered) = (0.690 + 0.700 + 0.696 + 0.647) / 4 = 0.68325

Unlevered Beta of company E can be considered as 0.68325

Therefore Levered Beta of company E = Unlevered Beta x [1+(1-tax) x D/E]

Levered Beta of company E = 0.68325 x [1+(1-0.35) x 0.65]

Levered Beta of company E = 0.972

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