El Capitan Foods has a capital structure of 37% debt and 63% equity, its tax rate is 35%, and its beta (leveraged) is 1.45. Based on the Hamada equation, what would the firm's beta be if it used no debt, i. e., what is its unlevered beta, bU?1.050.731.240.860.80

1.050

Explanation:

Data provided in the question:

Debt = 37% = 0.37

Equity = 63% = 0.63

Tax rate = 35% = 0.35

levered beta = 1.45

Now,

Using the Hamada equation

Levered beta = Unlevered beta * [ 1 + (1 - tax rate) * Debt-equity ratio ]

Thus,

1.45 = Unlevered beta * [ 1 + (1 - 0.35) * (0.37 : 0.63) ]

or

1.45 = Unlevered beta * [ 1 + 0.65 * (0.37 : 0.63) ]

1.45 = Unlevered beta * 1.382

or

Unlevered beta = 1.049 ≈ 1.050

Hence,

The answer is option 1.050