Given the information below on peer companies A-D, calculate the beta for company E if it...
Given the information below on peer companies A-D, calculate the beta for company E if it has net debt/equity of 0.65 and a tax rate of 35%.
| Company | Beta | Net debt / equity | tax rate |
| A | 1.25 | 1.15 | 35% |
| B | 1.45 | 1.48 | 35% |
| C | 1.32 | 1.23 | 35% |
| D | 1.08 | 0.95 | 35% |
Group of answer choices
0.97
1.03
1.05
1.02
Homework Answers
Unlevered beta = levered beta / [1 + (1-tax rate) x debt/equity]
| Company | Beta | Net debt / equity | tax rate | Unlevered Beta |
| A | 1.25 | 1.15 | 0.35 | 0.7153 |
| B | 1.45 | 1.48 | 0.35 | 0.7390 |
| C | 1.32 | 1.23 | 0.35 | 0.7335 |
| D | 1.08 | 0.95 | 0.35 | 0.6677 |
| Average unlevered Beta | 0.7139 | |||
Levered Beta = Unlevered beta x [1 + (1-tax rate) x debt/equity]
Levered Beta = 0.7139 x [1 + (1-0.35) x 0.65]
Levered Beta = 1.02
Therefore 4th option is correct.
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