The Tenplen Corporation has an asset beta of 1.05 and a debt beta of.8. The debt portion of the capital structure in market terms is.375. Tenplen has a zero tax rate. What is the equity beta?

Question

Quizplus · Accepted Answer

The equity beta (βE) can be calculated using the formula: βE = βA + (βA - βD)(D/E), where βA is the asset beta, βD is the debt beta, D/E is the debt-to-equity ratio, and E is the equity portion of the capital structure. Given that the debt portion is 0.375, the equity portion is 1 - 0.375 = 0.625. The debt-to-equity ratio (D/E) is therefore 0.375 / 0.625 = 0.6. Plugging these values into the formula gives: βE = 1.05 + (1.05 - 0.8)(0.6) = 1.05 + (0.25)(0.6) = 1.05 + 0.15 = 1.20.

The Tenplen Corporation Has an Asset Beta of 1