You are valuing Company A, a new start-up. You want to estimate the required return of its stockholders. You need an estimate of the asset beta for Company A's industry. You have data on two pure-play competitors (in the table). Estimate the asset beta for the industry as the average of the unlevered betas for the pure-play competitors. Assume that all three companies maintain a capital structure policy of a fixed debt-to-value ratio at their current levels. Use this information to answer the following three questions.

Data for Pure Play Firm

E Debt Equity V

Company 1 1.31 4B 7.8B 11.8B

Company 2 0.87 11.5B 23B 34.5B

41 What is the asset beta for Company 1? Assume that the debt betas are zero.

A) BU = 0.58

B) BU = 0.65

C) BU = 0.72

D) BU = 0.76

E) *BU = 0.87

42 Assume that Company 1's asset beta is 0.85 and Company 2's is 0.55. What is the equity beta for Company A if it adopts a capital structure of 25% debt-to-value? Assume that the debt betas are zero.

A) Be = 0.70

B) Be = 0.75

C) Be = 0.80

D) Be = 0.85

E) *Be = 0.93

43 Assume that the industry asset beta is 0.75. What is the equity beta for Company A if it adopts a capital structure of 25% debt-to-value and if its debt beta is equal to 0.1?

A) Be = 0.80

B) Be = 0.85

C) Be = 0.90

D) Be = 0.93

E) *Be = 0.97