ACCA FM · Chapter 12 · Question 6 of 9
A company has an equity beta of 1.4 and a market value debt to equity ratio of 30:70. Assuming debt is risk free and the tax rate is 25%, what is its asset (ungeared) beta, to 2 decimal places?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) 1.06
Explanation
Asset beta = equity beta x Ve / (Ve + Vd(1 - T)) = 1.4 x 70 / (70 + 30 x 0.75) = 1.4 x 70 / 92.5 = 1.0595, or 1.06. Ignoring tax gives 0.98, and multiplying instead of dividing (regearing) gives 1.85.
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