Company Risk Pusher currently has debt that accounts for 50% of its total capital source and the company's original unleveraged beta is 1.20 (before the company borrowed any debt). The company pays 40% tax. If the company decides to borrow more debt resulting in its total debt becoming 57.0% of total capital, how much riskier will the company become, measured by percentage increase in its beta?
Company Risk Pusher currently has debt that accounts for 50% of its total capital source and the company's original unleveraged beta is 1.20 (before the company borrowed any debt). The company pays 40% tax. If the company decides to borrow more debt resulting in its total debt becoming 57.0% of total capital, how much riskier will the company become, measured by percentage increase in its beta?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Company Risk Pusher currently has debt that accounts for 50% of its total capital source and the company's original unleveraged beta is 1.20 (before the company borrowed any debt). The company pays 40% tax.
If the company decides to borrow more debt resulting in its total debt becoming 57.0% of total capital, how much riskier will the company become, measured by percentage increase in its beta?
Expert Solution
Step 1
Levered beta if the beta of the firm after the issuance of the debt within the capital structure of the firm.
Levered beta can be calculated as follows:
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