Question

Galt Industries has a market capitalization of $50 billion, $30 billion in BBB rated debt, and $8 billion in cash. If Galt's equity beta is 1.15, then Galt's underlying asset beta is closest to:

Answer 1

Answer:  0.83

Explanation:

The asset beta will be a weighted average of the betas of the equity and debt betas

Asset Beta = (Equity beta * Equity/ (Equity + Net debt)) + (Debt beta * Net Debt/ (Equity + Net debt))

Average Debt beta for BBB rated debt is 0.1

Net debt = Debt - Cash

= 30 - 8

= $22 billion

Asset Beta = (1.15 * 50/(50 + 22)) + (0.1 * 22/ (50 + 22))

= 0.829166

= 0.83