The Free-Float Company, a company in the 36% tax bracket, has riskless debt in its capital structure which makes up 40% of the total capital structure, and equity is the other 60%.The beta of the
Assets for this business is 0.8 and the equity beta is:

Question

Quizplus · Accepted Answer

The equity beta ($\beta_E$) can be calculated using the formula $\beta_E = \beta_A + (\beta_A - \beta_D) \times \frac{D}{E}$, where $\beta_A$ is the asset beta, $\beta_D$ is the debt beta (which is 0 for riskless debt), $D$ is the proportion of debt in the capital structure, and $E$ is the proportion of equity in the capital structure. Given $\beta_A = 0.8$, $D = 40\%$, and $E = 60\%$, substituting these values gives $\beta_E = 0.8 + (0.8 - 0) \times \frac{0.4}{0.6} = 1.14$.

The Free-Float Company, a Company in the 36% Tax Bracket