A firm has debt beta of 0.2 and an asset beta of 1.9. If the debt-equity ratio is 75 percent, what is the levered equity beta?
A)1.90
B)3.18
C)2.42
D)2.63

Question

Quizplus · Accepted Answer

The levered equity beta ($\beta_E$) can be calculated using the formula: $\beta_E = \beta_A + (\beta_A - \beta_D) \times \frac{D}{E}$, where $\beta_A$ is the asset beta, $\beta_D$ is the debt beta, and $\frac{D}{E}$ is the debt-to-equity ratio. Given $\beta_A = 1.9$, $\beta_D = 0.2$, and $\frac{D}{E} = 0.75$, substituting these values into the formula gives $\beta_E = 1.9 + (1.9 - 0.2) \times 0.75 = 1.9 + 1.275 = 3.175$, which rounds to 3.18.

A Firm Has Debt Beta of 0