Ergophonics Inc. initially has equity with market value $5 billion. It has no debt. The equity...
Ergophonics Inc. initially has equity with market value $5 billion. It has no debt. The equity has beta 0.7. The firm is planning to issue $0.5 billion of debt, which will have beta of 0.2. The proceeds from the debt issue will be used to retire equity, such that firm size does not change. What will the new equity beta be?
a .680
b .722
c .756
d .800
e None of the above.
Homework Answers
The new equity beta is computed as shown below:
0.7 = ( 0.5 / 5 ) x 0.2 + ( 4.5 / 5 ) x equity beta
equity beta = 0.756 Approximately
So the correct answer is option c i.e. 0.756
Feel free to ask in case of any query relating to this question
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