unlevered beta example

[jgrandits]

have not seen this topic until tonite:
A publicly traded company has a beta of 1.2, a debt/equity ratio of 1.5, ROE of 8.1%, and a marginal tax rate of 40%. The unlevered beta for this company is closest to:
A) 1.071.
B) 0.632.
C) 0.832.
Your answer: A was incorrect. The correct answer was B) 0.632.
The unlevered beta for this company is calculated as:
1.2((1/1+(.6) x 1.5)) = .6316

 

[Chuckrox8]

Yeah I’m not sure schweser covers it. That’s the simplest version of a question like that I’ve seen. Usually they give you two companies, Company A wants to expand into a different product line and Company B solely operates in that particular industry. Pure play method I think. They’ll give you D/E, Betas, Taxes. If they want you to go a step further they’ll ask you to solve for the cost of equity or WACC entirely. These questions suck.

 

[slorte]

yep corp fin LOS 45i - Calculate and interpret the beta and cost of capital for a project.
as stated by chuckrox8^ - this is quite a simple version of this type of question. you have to know to use the comparable company’s D/E ratio & tax rate for the asset beta (that’s the UNLEVER the beta part).
it’s worth checking out the examples. this is one of the only places where corp fin gets hairy and I’ll bet you a twinkie we’ll get a similar question on the exam. or not.
it’s not complicated, but certainly something not to skip over.

 

[jgrandits]

you’re on for a beer….which would taste very good right now