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    Beta of debt, equity and assets

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    The following table lists possible rates of return for company X stock and debt and on the market portfolio. The probability is listed.

    State Probability Return on Stock (%) Return on Debt (%) Return on Market (%)

    1 0.1 3% 8% 5%
    2 0.3 8% 8% 10%
    3 0.4 20% 10% 15%
    4 0.7 15% 10% 20%

    a. What is the Beta of Company X debt?
    b. What is the Beta of Company X stock?
    c. If the debt-to equity Ratio of Company X is 0.5, what is the asset beta of Company X? Assume no taxes.

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    Solution Summary

    The solution calculates the beta of debt, equity and assets, given the probability distribution of return on equity, debt and market and the debt-equity ratio.