Retailclique is a British company and operates in the retail industry.A comparable firm from the same industry,Zeta Corporation,has an equity beta of 0.63,a market capitalization of equity equal to £1.44 billion,and a book value of debt equal to £0.13 billion.Find the asset beta of Zeta Corporation if its debt is risk-free.

Question

Quizplus · Accepted Answer

To find the asset beta, we use the formula:
asset beta = equity beta + (equity / debt) x (1 - tax rate) x debt beta
As debt is risk-free, the debt beta is 0.
Equity beta = 0.63
Market capitalization of equity = £1.44 billion
Book value of debt = £0.13 billion
Debt-to-equity ratio = 0.13 / 1.44 = 0.0903
Tax rate is not given, so let's assume it is 0.3 (30 percent)
asset beta = 0.63 + (1.44 / 0.13 x (1 - 0.3) x 0
asset beta = 0.63 + (11.0769 x 0.7 x 0)
asset beta = 0.5773, or approximately 0.577. 
Therefore, the answer is B.

Retailclique Is a British Company and Operates in the Retail