Question

please explain how the current unleveraged beta was caculated below. The example when typed in caculator isnt giving me the same answer.

6. AB Company has a debt-equity ratio (D/E) of 0.6, and its current leveraged beta (BL) is 1. If the company changes its debt-equity ratio to 0.4, what would be AB Company's new le )? The company's current unleveraged beta (Bu) is calculated as follows: Bu = Bu[1 + (1 - T)(D/E)] => 1.5 = By [1 + (1 - 0.4)(0.6)] => Bu = 1.103 New leveraged beta (Bi') is Bi' = Bu[1 + (1 - T)(D/E)] = 1.103 [1 + (1 -0.4)(0.4)] = 1.368

Answer 1

BL = Bu 1+ (1

1.5 = β [1 + (1 – 0.4) (0.6)

1.5 = β [1+ (06) (0.6)

1.5 = Bu [1 + 0.36)

1.5 = βυ (1.36

1.5 Bu = 1.36

Bu = 1.103