Answer to Question #131713 in Financial Math for Lorraine

Question

Hamada’s equation can be used to estimate the change of beta resultant from a change in leverage. Suppose a company has a beta of 2,00 with a debt/equity ratio of 2 and that the applicable tax rate is 28%. What would the unlevered beta be for the company as determined by the equation?

Answer 1

$Levered Beta=Unlevered Beta(1+(1-tax rate)(D/E Ratio))$

$2=Unlevered Beta(1+(1-0.28)(2))$

2=2.44 unlevered beta

unlevered beta=0.82