Question

Hartman Motors has $12 million in assets, which were financed with $2.4 million of debt and $9.6 million in equity. Hartman's beta is currently 1.5, and its tax rate is 35%. Use the Hamada equation to find Hartman's unlevered beta, b_U. Do not round intermediate calculations. Round your answer to two decimal places.

b_U =

Answer 1

From the Hamada equation, β = β_U[1 + (1 – T)(D/E)], we can calculate β_U as β_U = β/[1 + (1 – T)(D/E)]

β_U = 1.5/[1 + (1 – 0.35)($2,400,000/$9,600,000)]

β_U = 1.2903