You are considering decreasing your companys leverage by issuing more stock and paying off some of your companys existing debt. The company currently has a debt-equity ratio of 0.9, and an equity beta of 1.6. The risk-free rate is 2%, and the market risk premium is 4%. The company faces a corporate tax rate of 40%. The promised return (or YTM) on debt is 5% and the default probability is 20%, with a return of 0% in the event of default. If you go ahead with your plan, the companys debt-equity ratio will decrease to 0.4, and the debt beta will be 0.2. Assume the debt-equity ratio remains constant (both before and after the recapitalization). The CAPM holds.

1.What is your companys unlevered beta?

2. What would be the companys new equity beta?