You would like to know the beta of debt for KT Industries.The value of KT's outstanding equity is $50 million,and you have estimated its beta to be 1.62.You cannot,however,find enough market data to estimate the beta of its debt,so you decide to use the Black-Scholes formula to find an approximate value for the debt.KT has a five year zero coupon bond outstanding with a market value of $80 million.If the estimated $\Delta$ from the Black-Scholes model is .60,then the beta for KT's debt is closest to:
A) 1.00
B) 0.59
C) 0.90
D) 2.70

Question

Quizplus · Accepted Answer

The beta of debt can be approximated using the formula: $\beta_{debt} = \Delta \times \beta_{equity}$. Given $\Delta = 0.60$ and $\beta_{equity} = 1.62$, the calculation is $0.60 \times 1.62 = 0.972$. However, since the debt is less risky than equity, the beta of debt will be lower, and the closest option is 0.59.

You Would Like to Know the Beta of Debt for KT