IAI Actuarial Core Principles · Business Finance · Key principles of finance
A firm's equity beta is 1.2 with debt-to-equity of 0.5 (market values), tax rate 30%, and debt beta zero. Using the Hamada relationship, what is its asset (unlevered) beta, to two decimals?
The asset beta is about 0.89. Dividing the equity beta of 1.2 by one plus after-tax gearing, 1 + 0.7 × 0.5 = 1.35, gives 0.889. Ignoring tax would give 0.80, and multiplying instead of dividing would give 1.62.
- A0.89Correct
- B1.20
- C0.80
- D1.62
- 0.96
Explanation
Unlevered beta = 1.2 / (1 + (1−0.30) × 0.5) = 1.2 / 1.35 = 0.889, about 0.89. Ignoring tax gives 1.2/1.5 = 0.80. Multiplying rather than dividing gives 1.62.
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