BG's cost of equity is 9.4 percent,the expected return on the market is 13.6 percent,and the risk-free rate is 3.8 percent.What is the firm's debt-equity ratio if its asset beta is .36? Assume there is no preferred stock.

Question

Quizplus · Accepted Answer

First, we need to use the asset beta to find the unlevered beta of the firm. 
Unlevered Beta = Asset Beta / (1 + (1 - Tax Rate) x (Debt/Equity)) 
Since the tax rate and total debt are not given, we can assume a tax rate of 35% (typical for US companies) and solve for the debt/equity ratio. 
0.36 = 0.4 / (1 + (1 - 0.35) x Debt/Equity)
Debt/Equity = 0.59 
Therefore, the best choice is B.

BG's Cost of Equity Is 9