Question
A firm recently overhauled its capital structure, by replacing debt with equity: Before the overhaul, it had 20% equity and 80% debt in its capital
A firm recently overhauled its capital structure, by replacing debt with equity: Before the overhaul, it had 20% equity and 80% debt in its capital structure.
Its equity beta was 1.8 and its debt beta was 0.6.
After the overhaul, it has 50% equity and 50% debt in its capital structure.
Assume tax rate is 35% and also bankruptcy risk exists.
What is the firms equity beta after the change? A. 1.08 B. 1.15 C. 1.23 D. 1.29 E. 1.32
ADDITIONAL QUESTION: What will the firms equity beta be if it gets rid of all its debt?
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Advanced Accounting
Authors: Joe Hoyle, Thomas Schaefer, Timothy Doupnik
10th edition
0-07-794127-6, 978-0-07-79412, 978-0077431808
