El Capitan Foods has a capital structure of 45% debt and 55% equity,its tax rate is 25%,and its beta (leveraged)is 1.20.Based on the Hamada equation,what would the firm's beta be if it used no debt,i.e. ,what is its unlevered beta,b_U? A) 0.74 B) 0.58 C) 0.86 D) 0.77 E) 0.95

Question

Quizplus · Accepted Answer

The Hamada equation relates the levered beta (βL) to the unlevered beta (βU) as follows: βL = βU[1 + (1 - tax rate)(Debt/Equity)]. Given that the levered beta (βL) is 1.20, the tax rate is 25%, and the capital structure is 45% debt and 55% equity, we can rearrange the equation to solve for the unlevered beta (βU). Plugging in the values: 1.20 = βU[1 + (1 - 0.25)(0.45/0.55)], solving for βU gives approximately 0.74.

El Capitan Foods Has a Capital Structure of 45% Debt