1. Movie Inc., an entertainment conglomerate, has a beta of 1.60. Part of the reason for the high beta is the debt left over from the leveraged buyout of Pic Inc. in 2009, which amounted to $10 billion in 2014. The market value of equity at Movie Inc in 2014 was also $ 10 billion (and the book value of equity was also $10 billion). The marginal tax rate was 40%.

1. Estimate the unlevered beta for Movie Inc.

2. Estimate the effect of reducing the debt ratio (Total Debt/Total Assets) by 10% each year for the year (for example if the debt ratio was 40% it will be reduced to 30%) on the beta of the stock. Assume that Movie Inc has no short-term debt (i.e. TD=TL).