Question

You are considering opening a regional chain of fast food restaurants. Runza has a CAPM equity beta of 1.2 and a debt to equity ratio of 1.1. If the tax rate is 0.38 and your debt to equity ratio is 1.5, what is the CAPM equity beta of your business?

Answer 1

Beta of the asset = Equity beta / (1 + (D/E) * (1 - tax rate))
= 1.2 / (1 + 1.1 * (1 - 0.38))
= 1.2 / (1 + 0.682)
= 1.2 / 1.682
= 0.7134

Beta of the asset = 0.7134

Equity beta of your business = Beta of the asset * (1 + (D/E) * (1 - tax rate))
= 0.7134 * (1 + 1.5 * (1 - 0.38))
= 0.7134 * (1 + 0.93)
= 0.7134 * 1.93
= 1.377 or 1.38

Equity beta of your business = 1.377

Note: Round the answer as per your requirement.