Question

Hartman Motors has $20 million in assets, which were financed with $10 million of debt and...

Hartman Motors has $20 million in assets, which were financed with $10 million of debt and $10 million in equity. Hartman's beta is currently 1.2, and its tax rate is 30%. Use the Hamada equation to find Hartman's unlevered beta, bU. Do not round intermediate calculations. Round your answer to two decimal places.

bU =

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Answer #1

The Hamada equation is given by

where, is the unlevered beta

is the levered beta = 1.2

is the tax rate = 0.3

is the Debt to equity ratio

Since Hartman has equal debt and equity, the debt to equity ratio is 1

Substituting the Hamada's equation,

1.2 = Unlevered Beta * (1+(1-0.3)*1)

Unlevered Beta = 1.2/1.7 = 0.7059


Hartman's Unlevered Beta = 0.71

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