If a firm has an unlevered beta equal to 1.0 a debt-equity ratio of .50 and a tax rate of .30,calculate the value of the firm's levered beta.
A)0.65
B)1.00
C)1.35
D)1.73

Question

Quizplus · Accepted Answer

The formula for calculating the levered beta is:

Levered beta = Unlevered beta [1 + (1 - Tax rate) * (Debt/Equity)]

Substituting the given values,

Levered beta = 1.0 [1 + (1 - 0.30) * (0.5)]

Levered beta = 1.35

Therefore, the correct choice is C)1.35.

If a Firm Has an Unlevered Beta Equal to 1