Levered equity

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erlend941

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Hi, I have been stuck on this task for a couple of days now, and would really appreaciate some help.
“Your company has a debt to equity ratio of 2.5 and a constant debt policy. The company’s debt is risky with a beta equal to 0.1, and the market cost of debt is 3%. The corporate tax rate is 15%., the risk free rate is 1% and the return on levered equity is 12%. What is the beta of levered equity?”
As I already mentioned above I have been stuck on this for a while, and I have found no useful help on google or other search engines.
 
Unfortunately I’m not in posession of the solutions manual. I tried to solve it this way:
rd=rf+[rm-rf]*bd (solved for rm)
then re=rf+[rm-rf]*be (solved for be) and found that the beta of the levered equity is 0.55, but I’m not sure if this is the correct way to do it. May I ask how you came up with 0.35?
 
Beta is a measure of stock and not debt. So why use Beta for debt? That’s wrong to start with.
Of what I could gather the problem has lot of + data that are not required. Ignore the garbage.
You just need to delever by using the formula Beta (unleverd)= Beta (Levered)/(1+D/E)
 
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