Question

Bailey and Sons has a levered beta of 1.10, its capital structure consists of 40% debt and 60% equity, and its tax rate is 40%. What would Bailey's beta be if it used no debt, i.e., what is its unlevered beta?

Answer 1

Answer:

For converting levered beta into unlevered beta

bu = bL / (1+ ((1-t)D/E))

where

bL = Levered or Equity Beta

bu = Unlevered Beta (Asset Beta)

t = Corporate marginal tax rate

D = Market Value of Debt

E = Market Value of Equity

so bu = 1.10 / (1+(1-40%)40%/60%)

bu = 0.786