The Boat Company has a capital structure of 30 percent riskless debt and 70 percent equity.The assumed tax rate is 23 percent.If the asset beta is .9,what is the equity beta?

Question

Quizplus · Accepted Answer

The equity beta (βE) can be calculated using the formula: βE = βA [1 + (1 - Tax Rate) * (Debt/Equity)], where βA is the asset beta. Given βA = .9, Tax Rate = 23%, Debt/Equity = 30/70 = 0.4286, substituting these values gives: βE = .9 [1 + (1 - 0.23) * 0.4286] = .9 [1 + 0.77 * 0.4286] = .9 * 1.33 = 1.20.

The Boat Company Has a Capital Structure of 30 Percent