a. What happens to the beta of a firm as the firm adds debt to its capital structure?

b. Write the Hamada formula and identify each of the variables in this formula.

ANSWER: Bl = Bu [1+(1-t)(d/e)] Bl = current beta Bu = unleveraged beta (what would the beta be without the debt) D/E debt to equity ratio

c. Assume you have run a regression for a company using 5 years of monthly returns and find its beta to be 1.65. The current debt-to-equity ratio for the company is 75:25, and the corporate tax rate is 39%. Compute the unlevered beta for this company.

d. Now re-lever the company to a 25:75 debt-to-equity ratio and compute the new levered beta.