Harley Motors has $10 million in assets, which were financed with $2 million of debt and $8 million in equity. Harley's beta is currently 1.2 and its tax rate is 40 percent. Use the Hamada equation to find Harley's unlevered beta, bU.

Unlevered beta equals 1.04

Explanation:

The Unlevered beta of a firm is the risk of the company without the effect of debt in it capital structure in order to calculate value we need the levered beta of the Harley motors and it is given as 1.2

Formula for Unlevered beta = Levered beta/1+[ (1-tc) * debt / equity]

Then plugging in the values in the formula = 1.2/1+[ (1-0.4) (2000000/8000000)

=1.04

Unlevered beta is 1.04

Explanation:

The formula for unlevered beta is given as:

Unlevered Beta (βA) = Equity Beta (βE) / 1 + (1 - t) * D/E

Equity beta is levered beta given as 1.2

t is the tax rate of 40% or 0.40

D is the debt value of $ 2million =

E is the equity value at $8 million

Unlevered Beta (βA) = 1.2 / (1 + (1-0.4) * 2/8

Unlevered Beta (βA) = 1.2 / (1 + (0.6) * 2/8)

Unlevered Beta (βA) = 1.2/1 + (0.6) * 0.25

Unlevered Beta (βA) = 1.2/1+0.15

Unlevered Beta (βA) = 1.2/1.15

=1.04