Question

Hartman Motors has $19 million in assets, which were financed with $7.6 million of debt and $11.4 million in equity. Hartman's beta is currently 1.15, and its tax rate is 40%. Use the Hamada equation to find Hartman's unlevered beta, bU. Do not round intermediate calculations. Round your answer to two decimal places.

bU =

Answer 1

Answer:

$b_U=0.82$

Explanation:

The Hamada equation is given as:

$b_L=b_U[1+(1-T)(D/E)]$

given that:

$b_L$ = 1.15, T = tax rate = 40% = 0.04, equity = $11.4 million, debt = $7.6 million.

The debt to equity ratio D / E = debt / equity = $7.6 million / $11.4 million = 0.67

Substituting values:

$b_L=b_U[1+(1-T)(D/E)]\\1.15= b_U[1+(1-0.4)(0.67)]\\1.15=b_U[1+(0.6*0.67)]\\1.15=b_U(1.402)\\b_U=1.15/1.402=0.82$

$b_U=0.82$