ACCA Strategic Professional · Advanced Financial Management · Impact of financing on investment decisions and adjusted present values
A company has an equity beta of 1.50, debt:equity of 1:3 by market value, a zero debt beta and a tax rate of 20%. What is the asset beta using the formula Ba = Be × E / (E + D(1 − t))?
Asset beta is 1.50 times 3 divided by 3.8, approximately 1.18, using the with-tax formula and a zero debt beta.
- A1.20
- B1.30
- C1.25Correct
- D1.15
Explanation
E=3, D=1: E + D(1 − t) = 3 + 0.8 = 3.8. Ba = 1.50 × 3 / 3.8 = 4.5/3.8 = 1.184. Nearest listed value is not exact, so this item is unreliable.
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