   Chapter 14, Problem 4P Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

Solutions

Chapter
Section Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

UNLEVERED BETA Harley Motors has $10 million in assets, which were financed with$2 million of debt and $8 million in equity. Harley’s beta is currently 1 2, and its tax rate is 40%. Use the Hamada equation to find Harley’s unlevered beta, bU. Summary Introduction To identify: The unlevered beta of Company H. Unlevered Beta: The unlevered beta is also known as asset beta as to identify the volatility of return, the company doesn’t take into consideration of debt. Explanation Given, The levered beta is 1.2. The tax rate is 40% or 0.40. The debt is 2 million. The equity is$8 million.

Formula to calculate the unlevered beta,

UnleveredBeta=LeveredBeta1+((1TaxRate)×DebtEquity)

Substitute 1.2 for levered beta, 0.40 for tax rate, $2,000,000 for debt and$8,000,000 for equity.

UnleveredBeta=1

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