Your firm is planning to invest in a new electrostatic power generation system.Electrostat Inc is a firm that specializes in this business.Electrostat has a stock price of $25 per share with 16 million shares outstanding.Electrostat's equity beta is 1.18.It also has $220 million in debt outstanding with a debt beta of 0.08.Your estimate of the asset beta for electrostatic power generators is closest to:
A)0.76.
B)0.79.
C)0.93.
D)1.10.

Question

Quizplus · Accepted Answer

The asset beta can be calculated using the formula: Asset Beta = (Equity Beta * (Equity / (Equity + Debt))) + (Debt Beta * (Debt / (Equity + Debt))). Here, Equity = $25 * 16 million = $400 million, Debt = $220 million. Plugging in the values: Asset Beta = (1.18 * (400 / (400 + 220))) + (0.08 * (220 / (400 + 220))) = 0.79.

Your Firm Is Planning to Invest in a New Electrostatic