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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.
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The solution determines the premium for financial risk.
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- 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] = ...
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