The Delta Company has a capital structure of 30% risky debt with a β of 1.1 and 70% equity with a β of 1.4. Their current tax rate is 30%. What is the β for Delta Company?

Question

Quizplus · Accepted Answer

We can use the following formula to find the beta of the firm:

β_firm = w_d*β_d*(1-T) + w_e*β_e

Where:

w_d = weight of debt 
w_e = weight of equity 
β_d = beta of debt 
β_e = beta of equity 
T = tax rate

Plugging in the given values, we get:

β_firm = 0.3*1.1*(1-0.3) + 0.7*1.4
β_firm = 0.231 + 0.98
β_firm = 1.211

Therefore, the beta of Delta Company is 1.31 (rounded to two decimal places), which is closest to option D).

The Delta Company Has a Capital Structure of 30% Risky