EVS& Co. has a levered beta of 1.10, its capital structure consists of 40% debt
ID: 2766962 • Letter: E
Question
EVS& Co. has a levered beta of 1.10, its capital structure consists of 40% debt and 60% equity, and its tax rate is 40%. What would EVS beta be if it used no debt, i.e., what is its unlevered beta? 0.71 0.64 0.67 0.75 0.79 Grove Inc. is a zero-growth company that currently has zero debt. The company is considering moving to the market value capital structure with the values of debt of $213,333. The money raised would be used to repurchase stock. Find the new number of shares after the repurchase. The old number of shares was 8,000. Stock price is $40.Explanation / Answer
Unlevered Beta = Levered Beta / [1+(1-Tc) x (D/E)]
=> 1.10/[1+(1-0.4) x (0.4/0.6)] = 0.786 or 0.79
Total number of shares re-purchased = $213,333/$40 = 5,333 Shares
The new number of shares = 8,000 – 5,333 = 2,667
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