# Levered and unlevered beta

A company currently has a capital structure consisting of 30% debt, and 70% equity. However the company CFO has suggested that the firm increase its debt ratio to 50%. The current risk free rate is 6% and the market risk premium is 5% while the beta is 1.30.

If the firm tax rate is 40%, what would the beta of an all-equity firm be if it operation were exactly the same? What would if be if this company raises its debt ratio to 50%? What would its cost of equity change?

Please provide a spread sheet with explaining process.

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#### Solution Preview

Please see the Excel file attachment.

Beta of the all equity firm would be the unlevered beta

Unlevered beta = Levered ...

#### Solution Summary

The solution explains how to calculate levered and unlevered beta.

$2.19