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4 October, 09:08

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

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  1. 4 October, 10:15
    0
    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
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