Question
Firm D is an unlisted private firm. Hence, there are no stock return data to estimate the equity beta of the firm D. The firm
Firm D is an unlisted private firm. Hence, there are no stock return data to estimate the equity beta of the firm D. The firm D has the debt to equity (D/E) ratio of 0.7. The firm Ds tax rate is 35%. And the average industry tax rate (t) is 35%
Assume there are only three other firms (A, B and C) in the industry as shown below in the table. The table shows equity betas of the firms with the debt to equity ratios.
The firm D wants to use the information available from its industry to determine its equity beta. Find out the firm Ds equity beta. (Hint: use unlever and re-lever procedures)
Company | Equity beta | D/E |
A | 1.5 | 1.2 |
B | 1.4 | 1.1 |
C | 0.9 | 0.7 |
a) greater than 1.15 b)greater than 1.06 but less than 1.15 c)less than 1.0 d)greater than 1.0 but less than 1.06
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