The Delta Dam Company has a capital structure of 80% risky debt with a β of .9 and 20% equity with a β of 1.6. Their current tax rate is 34%. What is the β if Delta Dam was an unlevered firm?

Question

Quizplus · Accepted Answer

The unlevered beta is calculated as follows:βu = βL * (1 - (1 - T) * D/E)where:βu = unlevered betaβL = levered betaT = tax rateD/E = debt-to-equity ratioPlugging in the given values, we get:βu = 0.9 * (1 - (1 - 0.34) * 0.8/0.2)βu = 0.9 * (1 - 0.528)βu = 0.9 * 0.472βu = 0.4248Therefore, the unlevered beta is 0.4248, which is closest to choice A, 1.09.

The Delta Dam Company Has a Capital Structure of 80