Assume a firm is financed with $3,000 debt and $7,000 equity. The beta of the equity is 0.8. The risk-free rate is 3%, and the equity premium is 7%. If the overall cost of capital of the firm
Is 8%, what is the beta of the firm's debt?

Question

Quizplus · Accepted Answer

The correct answer is C. The beta of the firm's debt can be calculated using the following formula:Beta of debt = (Cost of capital - (Beta of equity * Equity premium)) / (Risk-free rate * (1 - Beta of equity))Plugging in the given values, we get:Beta of debt = (0.08 - (0.8 * 0.07)) / (0.03 * (1 - 0.8)) = 0.51

Assume a Firm Is Financed with $3,000 Debt and $7,000