The Tenplen Corporation has an equity beta of 1.2 and a debt beta of.8. The firm's market value debt to equity ratio is.6. Tenplen has a zero tax rate. What is the asset beta?
A) 0.70.
B) 1.04.
C) 1.05.
D) 0.96.
E) 0.72.

Question

Quizplus · Accepted Answer

The asset beta (unlevered beta) can be calculated using the formula: Asset Beta = (Equity Beta * Equity / (Equity + Debt)) + (Debt Beta * Debt / (Equity + Debt)). Given the debt to equity ratio of 0.6, the equity portion is 1 and the debt portion is 0.6. Therefore, Asset Beta = (1.2 * 1 / 1.6) + (0.8 * 0.6 / 1.6) = 1.05.

The Tenplen Corporation Has an Equity Beta of 1