Banisters is valued at $8.6 million and has debt of $2.1 million outstanding.The unlevered firm beta is 1.72,and the tax rate is 21 percent.What is the levered equity beta?

Question

Quizplus · Accepted Answer

The levered equity beta ($\beta_L$) can be calculated using the formula: $\beta_L = \beta_U [1 + ((1 - Tax Rate) * (Debt/Equity))]$, where $\beta_U$ is the unlevered beta, Debt is the total debt, and Equity is the value of the firm minus the debt. Given that $\beta_U = 1.72$, Tax Rate = 21%, Debt = $2.1 million, and the firm's value is $8.6 million, we find Equity = $8.6 million - $2.1 million = $6.5 million. Plugging these values into the formula gives: $\beta_L = 1.72 [1 + ((1 - 0.21) * (2.1/6.5))]$, which calculates to approximately 2.16.

Banisters Is Valued at $8