Determine the pure project beta of a project that has 30% debt and 70% equity. The beta for the company is 1.4, and it has a tax rate of 40%.
A) 1.11
B) 1.56
C) 1.83
D) 1.05

Question

Quizplus · Accepted Answer

The formula to calculate the pure project beta is:
Pure project beta = Unlevered beta / (1 + (1 - tax rate) x (debt/equity))
First, we need to calculate the unlevered beta:
Unlevered beta = Company beta / (1 + (1 - tax rate) x (debt/equity))
= 1.4 / (1 + (1 - 0.4) x (0.3/0.7))
= 1.11
Now we can calculate the pure project beta:
Pure project beta = 1.11 / (1 + (1 - 0.4) x (0.3/0.7))
= 1.05
Therefore, the best choice is A.

Determine the Pure Project Beta of a Project That Has