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Company A has a debt to equity ratio of 0.27 and a tax rate of 30%....

Company A has a debt to equity ratio of 0.27 and a tax rate of 30%. The covariance between Company A's historical stock returns and the S&P 500's historical stock returns, divided by the variance of the S&P 500's historical stock returns, is 0.98. What is Company A's asset beta?

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Expert Solution

Equity beta=Covariance between company and market/variance of market's returns=0.98

Asset beta=Equity beta/(1+(1-tax rate)*Debt/Equity)=0.98/(1+(1-30%)*0.27)=0.824222035

jeff jeffy answered 2 years ago
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