ye Industries currently uses no debt, but its new CFO is considering changing th

Question

ye Industries currently uses no debt, but its new CFO is considering changing the capital structure to 40.0% debt (wd) by issuing bonds and using the proceeds to repurchase and retire common shares so the percentage of common equity in the capital structure (wc) = 1 – wd. Given the data shown below, what will the new leveraged beta, b, be if the new proposed capital structureis implemented? PLEASE SHOW HOW YOU DID IT? I'm getting the wrong answer.

Current Beta 1.15

Tax Rate 40%

Current wc 0%

Target wc 25%

A. 1.15

B. 1.20

C. 1.23

D. 1.38

E. 1.110

Explanation / Answer

Levered Beta = Unlevered Beta x (1 + ((1 – Tax Rate) x (Debt/Equity)))

Levered Beta = Unlevered Beta x (1 + ((1 – Tax Rate) x (Debt/Equity)))

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