Purchase Solution

Premium for Financial Risk - Beta Corp

Not what you're looking for?

Ask Custom Question

Beta Corp has an unlevered beta of 1.0. Beta Corp is financed with 50% debt and has a levered beta of 1.6.If the risk free rate is 5.5% and the market risk premium is 6% how much is the additional premium that Beta Corp shareholders require to be compensated for financial risk?

Explain how to evaluate the use of securities options in risk hedging as they might apply to common organizational activities.

Purchase this Solution

Solution Summary

The solution determines the premium for financial risk.

Solution Preview

- Beta Corp has an unlevered beta of 1.0. Beta Corp is financed with 50% debt and has a levered beta of 1.6.If the risk free
rate is 5.5% and the market risk premium is 6% how much is the additional premium that Beta Corp shareholders require to be compensated for financial risk?

The formula to calculate a company's unlevered beta is:
unlevered beta = levered beta/[1+(1-tax)*(Debt/Equity)]
or,
1.0 = 1.6/[1+(1-tax)*(50%/50%)]
[1+(1-tax)*1] = ...

Purchase this Solution


Free BrainMass Quizzes
Situational Leadership

This quiz will help you better understand Situational Leadership and its theories.

Organizational Leadership Quiz

This quiz prepares a person to do well when it comes to studying organizational leadership in their studies.

Marketing Research and Forecasting

The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.

Accounting: Statement of Cash flows

This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.

Writing Business Plans

This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.