Question

El Capitan Foods has a capital structure of 36% debt and 64% equity, its tax rate is 35%, and its beta (leveraged) is 1.40. 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? 1.03 1.29 0.80 0.88 1.15

Answer 1

The unlevered beta is 1.03

Step-by-step explanation:

The formula for unlevered beta is given below:

Unlevered Beta (βA) = Equity Beta (βE) /1 + (1 − t) × D/E

equity beta is 1.40

t is the tax rate at 35% or 0.35

D is the debt value given as 36% or 0.36

E is the equity value given as 64% or 0.64

Unlevered Beta (βA=1.40/(1+(1-0.35)*0.36/0.64

Unlevered Beta (βA)=1.40/1+(0.65)*0.36/0.64

Unlevered Beta (βA)=1.40/1+(0.65)*0.5625

Unlevered Beta (βA)=1.40/1+0.365625

Unlevered Beta (βA)=1.40/1.365625

=1.025171625 approx. 1.03