The Delta Dam Company has a capital structure of 20% risky debt with a$\beta$ of .9 and 80% equity with a $\beta$ of 1.7. Their current tax rate is 34%. What is the $\beta$ for Delta Dam Company?

Question

Quizplus · Accepted Answer

The correct answer is calculated using the formula for the weighted average cost of capital (WACC) beta ($\beta_{WACC}$), which accounts for the different proportions of debt and equity in a company's capital structure, as well as the effect of taxes on the cost of debt. The formula is: $\beta_{WACC} = \beta_{Equity} \times (E/V) + \beta_{Debt} \times (D/V) \times (1 - Tax Rate)$, where $E/V$ is the proportion of equity in the company's value, $D/V$ is the proportion of debt in the company's value, $\beta_{Equity}$ is the beta of the company's equity, and $\beta_{Debt}$ is the beta of the company's debt. Plugging in the given values: $\beta_{WACC} = 1.7 \times 0.8 + 0.9 \times 0.2 \times (1 - 0.34)$, which calculates to approximately 1.54.

The Delta Dam Company Has a Capital Structure of 20 β\betaβ

The Delta Dam Company Has a Capital Structure of 20 $\beta$