Exam Preparation: Un$-$levering and Re$-$levering Beta

Information for the firm:

Market rate $($rm$)=0\mathrm{.}12$ Current Debt $$85,000$

Risk free rate $($rrf$)=0\mathrm{.}05$ Current equity $$100,000$

Market risk prem $=0\mathrm{.}07$ Current D$/$E $=$ $$0\mathrm{.}85$

Tax rate $=0\mathrm{.}40$ New debt level $$45,000$

Current beta $(\backslash$beta $)1\mathrm{.}40$ Proposed D$/$E $=0\mathrm{.}45$

Notice that in this exercise the firm is planning a capital structure change to reduce the amount of debt.

Plug the values from the information above into the Hamada equations.

Step $1$: Un$-$lever $\backslash$beta $=$

Step $2$: Re$-$lever $\backslash$beta $=$

Step $3$: Calculate CAPM rrf $+($MRP$)\backslash$times $\backslash$beta

Current $=$

Proposed $=$

Change in $\backslash$beta $=$

Change in CAPM $=$