A firm is valued at $8 million and has debt of $2 million outstanding. The firm has an equity beta of 1.5 and a debt beta of .60. The beta of the overall firm is:

Question

Quizplus · Accepted Answer

The overall firm beta is calculated using the formula: β_firm = (E/V) * β_equity + (D/V) * β_debt, where E is equity value, D is debt value, and V is the total firm value. Here, E = $6 million, D = $2 million, V = $8 million. So, β_firm = (6/8) * 1.5 + (2/8) * 0.60 = 1.275.

A Firm Is Valued at $8 Million and Has Debt