Hairston Industries has $5 million of debt and $20 million of equity. If Hairston's beta is currently 1.75 and its tax rate is 40%, what is its unlevered beta, bU?

The un levered beta (bu) of the company is 1.52

Explanation:

Given information -

Equity (E) - $20 million

Debt (D) - $5 million

Beta (levered) - 1.75

Tax rate (T) = 40%

D / E (Debt to Equity ratio) = $ 5 million / $20 million =.25

Formula for taking out un levered beta (bu) is -

Beta levered (bl) = Beta un levered (bu) [1 + (1 - T) D / E ]

1.75 = bu [1 + (1 - 40%).25

1.75 = bu [1 +.6 x. 25 ]

1.75 = bu [ 1 +.15 ]

1.75 = bu [ 1.15 ]

bu = 1.75 / 1.15

bu = 1.52