You are trying to estimate a beta for Zoom Tech. The regression beta over the last 5 years is 1.265, but the firm operated just in the Tech business and had an average debt to equity ratio of 25% over the period. The stock price is currently $60 per share and there are 35 million shares outstanding, and the current market value of debt is $ 450 million. Zoom is planning on borrowing $ 500 million and using $ 400 million to buy InfoPad Software, a small software firm with no debt and a beta of 1.30. It is also planning on using the remaining $ 100 million to pay a dividend to its stockholders. (Tax rate is 40%).

What is Zoom's levered beta after the transaction? Hint(dividend reduces the value of Equity)

a.

1.45

b.

1.56

c.

2.21

d.

1.21

e.

0.81

Answer is not d. 1.21, I submitted it once thinking that was the right answer but it was wrong.