Alpha Company has riskless debt,a debt-equity ratio of .46,a tax rate of 21 percent,and an unlevered firm beta of 1.23.What is the equity beta?

Question

Quizplus · Accepted Answer

The equity beta ($\beta_{equity}$) can be calculated using the formula: $\beta_{equity} = \beta_{asset} (1 + (1 - Tax Rate) * Debt/Equity)$. Given that the unlevered firm beta ($\beta_{asset}$) is 1.23, the debt-equity ratio is 0.46, and the tax rate is 21%, we can substitute these values into the formula: $\beta_{equity} = 1.23 * (1 + (1 - 0.21) * 0.46)$, which simplifies to $\beta_{equity} = 1.23 * (1 + 0.79 * 0.46)$, leading to $\beta_{equity} = 1.23 * (1 + 0.3634) = 1.23 * 1.3634 = 1.677$, which rounds to 1.68.

Alpha Company Has Riskless Debt,a Debt-Equity Ratio of