A firm has an equity beta of 1.2,the risk-free rate is 3.4 percent,the market return is 15.7 percent,and the pretax cost of debt is 9.4 percent.The debt-equity ratio is .47.If you apply the common beta assumptions,what is the firm's asset beta?

Question

Quizplus · Accepted Answer

The asset beta ($\beta_A$) can be calculated using the formula $\beta_A = \frac{\beta_E}{1 + ((1 - T) \times D/E)}$, where $\beta_E$ is the equity beta, $T$ is the tax rate (which is not provided, so we assume taxes are not considered in this calculation), and $D/E$ is the debt-to-equity ratio. Given $\beta_E = 1.2$ and $D/E = 0.47$, the calculation is $\beta_A = \frac{1.2}{1 + (1 \times 0.47)} = \frac{1.2}{1.47} \approx 0.82$.

A Firm Has an Equity Beta of 1