Question

firm has debt beta of 0.20 and an equity beta of 3.18. If the debt-value ratio is 42%, what is the unlevered equity beta?

Answer 1

Equity Beta = 3.18

Debt to value of ratio = 40%

Weight of equity = 58%.

Tax rate = 0 (Not Given So)

Now calculated unlevered beta using following formula:

Unlevered beta = beta (levered) / 1 + (1 - tax rate) x (Debt/Equity)

                         = 3.18 / [1+ (1 – 40%) × (42% / 58%)]

                         = 3.18 / [1+ 0.72]

                         = 1.84

Unlevered beta of company if company has zero debt is 1.84.