EZCUBE Corp. is 50% financed with long-term bonds and 50% with common equity. Th

Question

EZCUBE Corp. is 50% financed with long-term bonds and 50% with common equity. The debt securities have a beta of .15. The company’s equity beta is 1.25. What is EZCUBE’s asset beta? EZCUBE Corp. is 50% financed with long-term bonds and 50% with common equity. The debt securities have a beta of .15. The company’s equity beta is 1.25. What is EZCUBE’s asset beta? EZCUBE Corp. is 50% financed with long-term bonds and 50% with common equity. The debt securities have a beta of .15. The company’s equity beta is 1.25. What is EZCUBE’s asset beta?

Explanation / Answer

Assuming 35% as taxes,

a = [ Ve/(Ve + Vd(1-t))*e] + [ Vd(1-t)/(Ve + Vd(1-t))*d]

a = asset beta

e = equity beta

d = debt beta

Ve = Value of equity

Vd = Value of debt

Therefore, putting figures into above formula,

a          =             [{0.5/(0.5+0.5(1-0.35)}*1.25] + [{0.5(1-0.35)/(0.5+0.5(1-0.35)}*0.15]

                =             [(0.5/0.825)*1.25] + [(0.325/0.825)*0.15

                =             0.7576 + 0.059

                =             0.8167

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