Alibaba has issued zero-coupon debt due in 4 years with a face value of $1000 billion which is now traded for $750 billion. Alibaba is planning to reinvest all its earnings without paying any dividend. Suppose Alibaba currently has a market value of $400 billion and the risk-free rate is 5.13%. The implied volatility is 25%.

(a) If Alibaba's current equity beta is 1.2, estimate the unlevered beta.
(b) Estimate the beta of debt.

Answer rating: 100% (QA)

a To estimate the unlevered beta we can use the following formula Unlevered Beta Equity Beta ... View the full answer