White's World Wide Delivery Inc.has an unlevered beta = 1.25,a debt-equity ratio of 0.30,a tax rate of 0.20,and a levered beta = 1.55.If the firm increased the debt-equity ratio to 50%,what would be the impact on the levered beta?

Question

Quizplus · Accepted Answer

The levered beta is calculated as follows: 
Levered beta = Unlevered beta * (1 + (1 - tax rate) * debt/equity)
Substituting the current values, we get,
1.55 = 1.25 * (1 + (1 - 0.20) * 0.30)
If the debt-equity ratio is increased to 50%, the new levered beta can be calculated as follows:
Levered beta = 1.25 * (1 + (1 - 0.20) * 0.50) = 1.75
Therefore, the answer is A.