Question

Counts Accounting has a beta of 1.55. The tax rate is 35%, and Counts is financed with 45% debt. What is Counts' unlevered beta? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Levered Beta = 1.55
Tax Rate = 35%
Weight of Debt = 45%

Weight of Equity = 1 - Weight of Debt
Weight of Equity = 1 - 0.45
Weight of Equity = 0.55

Debt/Equity Ratio = Weight of Debt / Weight of Equity
Debt/Equity Ratio = 0.45 / 0.55
Debt/Equity Ratio = 9 / 11

Unlevered Beta = Levered Beta / [1 + (1 - tax) * (D/E Ratio)]
Unlevered Beta = 1.55 / [1 + (1 - 0.35) * (9 / 11)]
Unlevered Beta = 1.55 / 1.53182
Unlevered Beta = 1.01

So, unlevered beta of Counts’ Accounting is 1.01