Suppose a firm’s business operations mirror movements in the economy as a whole

Question

Suppose a firm’s business operations mirror movements in the economy as a whole very closely—that is, the firm’s asset beta is 1. Find the equity beta for this firm for debt–equity ratios of 0, 1.5, 5.5, and 15. (Do not round intermediate calculations and round your final answer to 1 decimal place. (e.g., 32.1))

Suppose a firm’s business operations mirror movements in the economy as a whole very closely—that is, the firm’s asset beta is 1. Find the equity beta for this firm for debt–equity ratios of 0, 1.5, 5.5, and 15. (Do not round intermediate calculations and round your final answer to 1 decimal place. (e.g., 32.1))

Explanation / Answer

Equity beta = Asset beta×[1+(1-Tax)×(D÷E)]

If debt equity ratio = 0:

Equity beta = 1×[1+(1-0)×0] = 1

If debt equity ratio = 1.5:

Equity beta = 1×[1+(1-0)×1.15] = 2.2

If debt equity ratio = 5.5:

Equity beta = 1×[1+(1-0)×5.5] = 6.5

If debt equity ratio = 15:

Equity beta = 1×[1+(1-0)×15] = 16

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.