Firm D is an unlisted private firm. Hence, there are no stock return data to estimate the equity beta of the firm D. The firm D has the debt to equity (D/E) ratio of 0.7. The firm D's tax rate is 35%. And the average industry tax rate (t) is 35%
Assume there are only three other firms (A, B and C) in the industry as shown below in the table. The table shows equity betas of the firms with the debt to equity ratios.
The firm D wants to use the information available from its industry to determine its equity beta. Find out the firm D's equity beta. (Hint: use unlever and re-lever procedures)
|
Company
|
Equity beta
|
D/E
|
|
A
|
1.5
|
1.2
|
|
B
|
1.4
|
1.1
|
|
C
|
0.9
|
0.7
|
a) greater than 1.15
b) greater than 1.06 but less than 1.15
c) less than 1.0
d) greater than 1.0 but less than 1.06