Question
In: Finance
The beta of an all equity firm is 1.6. The beta of debt is 0.2.If the...
The beta of an all equity firm is 1.6. The beta of debt is 0.2.If the firm changes its capital structure to 60% debt and 40% equity using 10% debt financing, what will be the beta of the levered firm? (Assume no taxes.)
A. 4.0
B. 3.7
C. 3.4
D. 2.8
Solutions
Expert Solution
Beta Levered = Beta unlevered + (Beta unlevered - Beta debt) * D/E = 1.6 + (1.6-0.2)* 60/40 = 3.7
Answer is B. 3.7
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