Question

Visscher Inc. has a capital structure of 55% debt and 45% equity, its tax rate is 25%, and its levered beta is 1.15. Based on the Hamada equation, what would the firm's beta be if it used no debt, i.e., what is its unlevered beta, bu? O 0.6000 0.7500 O 0.8750 0.9000 1.0000

Answer 1

Given,

Debt (D) = 55% or 0.55

Equity (E) = 45% or 0.45

Tax rate (T) = 25% or 0.25

Levered beta (b_L) = 1.15

Solution :-

Accoading to Hamada equation, b= by %3D where, Levered beta beta bu = Unlevered T= Tax rate D/E = Debt - equity aàatio Now, 10.55 0.45 1,15 = bu 1+(1-0.35)() 1,15= bul+ (0.75)(1.2222222 1. 15 = bullt 0.9166 66665 1.15= bul 1.916666665 1.15 = %3D

1.15 1.916666665 bu O. 6000 bu Thus, Unlevered betalbu) is 0.6000