AQ3: The following questions relate to drug retailer CVS. Show your calculations.

A. Suppose CVS has an equity beta of 0.85 and a debt beta is zero. Estimate the unlevered beta (also known as asset beta) of CVS. What does the unlevered beta tell you about CVS?

B. Suppose CVS were to increase its debt-equity ratio to 0.8. Assuming its debt beta were still zero, what would you expect its equity beta to be after the increase in leverage? What insight can you draw from your answer in this part in relation to the equity beta in Part A.

C. You are concerned about the assumption of debt beta in Part B. You gather some relevant data and estimate the debt beta to be 0.2 (rather than zero). What would you expect its equity beta be with a debt-equity ratio of 0.8? Is this different from your answer in Part B? What insight can you draw from your answer in this part in relation to your answer in Part B.