question archive Bailey and Sons has a levered beta of 1
Bailey and Sons has a levered beta of 1
Subject:FinancePrice:2.87 Bought7
Bailey and Sons has a levered beta of 1.10, its capital structure consists of 40% debt and 60% equity, and its tax rate is 40%. What would Bailey's beta be if it used no debt, i.e., what is its unlevered beta?
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Answer:
For converting levered beta into unlevered beta
bu = bL / (1+ ((1-t)D/E))
where
bL = Levered or Equity Beta
bu = Unlevered Beta (Asset Beta)
t = Corporate marginal tax rate
D = Market Value of Debt
E = Market Value of Equity
so bu = 1.10 / (1+(1-40%)40%/60%)
bu = 0.786
