Page 383 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx

Answers

Example 9

A company has an asset beta of 0.9. It has an equity to debt ratio of 8:2 by
market values.

The tax rate is 30%.

Required:

What is the company’s equity beta?

Solution

V [1 – t]
D
ß = ß + [ß – ß ] [ V E ]
eu
d
eu
eg
= 0.9 + 0.9 [2(1 – 0.30)/8]
= 1.058

(assuming that the debt beta is zero)

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