Big City Lumber Inc.has a levered beta of 1.70,a debt-equity ratio of 0.40,and a tax rate of 25%.What is the value of the firm's unlevered beta?
A)0.78
B)1.00
C)1.31
D)1.70

Question

Quizplus · Accepted Answer

To find the unlevered beta, we need to remove the effects of financial leverage from the firm's levered beta. This can be done using the following formula:

Unlevered beta = Levered beta / (1 + (1 - tax rate) x Debt/Equity)

Plugging in the given values:

Unlevered beta = 1.70 / (1 + (1 - 0.25) x 0.40)
Unlevered beta = 1.31

Therefore, the value of the firm's unlevered beta is 1.31. Option C is the correct choice.