A firm is valued at $6 million and has debt of $2 million outstanding. The firm has an equity beta of 1.8 and a debt beta of .42. The beta of the overall firm is:

Question

Quizplus · Accepted Answer

To calculate the beta of the overall firm, we need to use the following formula:

Beta of Overall Firm = (Equity Value / Total Value) * Equity Beta + (Debt Value / Total Value) * Debt Beta

First, we need to calculate the total value of the firm:

Total Value = Equity Value + Debt Value = $6 million + $2 million = $8 million

Next, we can plug in the values we have:

Beta of Overall Firm = ($6 million / $8 million) * 1.8  + ($2 million / $8 million) * 0.42
                     = 1.35

The closest answer choice to 1.35 is D) 1.34, so that is the best choice.

A Firm Is Valued at $6 Million and Has Debt