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    Levered and unlevered beta

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    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.

    © BrainMass Inc. brainmass.com June 3, 2020, 11:04 pm ad1c9bdddf
    https://brainmass.com/business/capital-asset-pricing-model/levered-unlevered-beta-261924

    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

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