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Chapter 10

Example 8

A company has an equity beta of 1.4. It has a debt to equity ratio of 3:7 by
market values.

The tax rate is 30%.

Required:

What is the company’s asset beta?

Solution

V E V [1 – t]
D
ß = ß eg [ V + V [1 – t] ] +ß [ V + V [1 – t] ]
d
eu
E
D
E
D
= 1.4 × 7/[7 + 3(1 – 0.30)]
= 1.077
(assuming that the debt beta is zero)

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