Determine the pure project beta of a project that has 45% debt and 55% equity. The beta for the company is 1.6, and it has a tax rate of 40%.
A) 1.82
B) -1.82
C) 1.07
D) 2.07

Question

Quizplus · Accepted Answer

The pure project beta can be calculated using the formula for unlevered beta: Unlevered Beta = Levered Beta / [1 + (1 - Tax Rate) * (Debt/Equity)]. Here, Levered Beta = 1.6, Tax Rate = 0.4, Debt/Equity = 0.45/0.55. Unlevered Beta = 1.6 / [1 + (1 - 0.4) * (0.45/0.55)] = 1.07.

Determine the Pure Project Beta of a Project That Has