Question

Alpha Company has riskless debt, a debt-equity ratio of .46, a tax rate of 35 percent, and an unlevered firm beta of 1.23. What is the equity beta?

Answer 1

Answer:

Equity Beta= 2,529

Explanation:

The risk of investing in a particular stock is measured with a metric referred to as equity beta. Equity Beta measures the volatility of the stock to the market, how sensitive is the stock price to a change in the overall market. It compares the volatility associated with the change in prices of a security. It changes with the capital structure of the company which includes the debt portion.

There are 3 methods to calculate Equity Beta:

1- Using the CAPM Model

2- Using Slope Tool

3- Using Unlevered Beta

In this exercise, we have the information to use the third method.

Equity Beta Formula = Unlevered Beta [ 1 + (D/E)( 1-Tax )]

Unlevered Beta= 1,23

D/E= 0,46

Tax rate= 0,35

Equity Beta = 1,23 + (1+0,46*0,65)

Equity Beta= 2,529