Question

Currently ABM Corp beta is 0.86. The market value of equity is $500M, and the market value of assets is 800M. The company is considering repurchasing its bonds for $20M and issuing common stock for the same amount. Estimate unleveraged beta if risk-free rate is 3.7% and the stock market risk premium is 7.2%. The company pays 24% taxes on its profits.

Answer 1

Unlevered beta is a risk measurement metric that compares the risk of a company without any debt to the risk of the market. In simple language, it is the beta of a company without considering the debt. It is also referred as asset beta because the risk of a firm after removing leverage is because of its assets.

Unlevered Beta = Levered Beta Divide 1+ (1-Tax) (Debt / Equity)

Beta Levered = 0.86 (Given)

Amount of Debt after repurchase of bonds = 800 - 20 = 780

Amount of Equity after repurchase of bonds= 520

Unlevered Beta = 0.86 divide (1+(1-0.24)(780/ 520)

= 0.40