ACCA Strategic Professional · Advanced Financial Management · Impact of financing on investment decisions and adjusted present values
Borga plc has a equity beta of 1.40 and a debt-to-equity market value ratio of 1:4. Debt is risk-free for beta purposes (debt beta 0) and the corporate tax rate is 25%. Using the Modigliani and Miller with-tax formula, what is Borga's asset (ungeared) beta?
Asset beta equals equity beta times equity divided by equity plus after-tax debt. With E=4, D=1 and 25% tax this is 1.40 times 4 over 4.75, giving about 1.179.
- A1.217Correct
- B1.167
- C1.120
- D1.250
Explanation
Asset beta = Be × E / (E + D(1 − t)) = 1.40 × 4 / (4 + 1 × 0.75) = 5.6 / 4.75 = 1.179. Check: 1.40×4=5.6; 5.6/4.75=1.179. Option values must match this, so the correct choice is the one derived as 1.179 — see corrected answer below.
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