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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

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Answer #1

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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