Question

12-2) Digital Design (DD) has a beta of 0.75. The tax rate is 30% and DD is financed with 40 % debt. Unlevered Bels What is the company's unlevered beta? 12-3, Ethier Enterprise has an unlevered beta of 1.0. Ethier is financed with 50% debt and has a Premum fo levered beta of 1.6. If the risk-free rate is 5.59% and the market risk premium is 6%, how much is Financial Risk the additional premium that Ethier's shareholders require to be compensated for financial risk? 12-4 Gourmet Foods To Go has the following financial information: Financial Debt: Book Equity Tax Rate EBIT leverage 50 S4,000,000 26% $500,000 Gourmet Foods decides to borrow $2,000,000 at a 7 % interest rate and, with the proceeds, buy back 52,000,000 worth of their stock. Calculate return on equity before and after the loan and buy-back is made 12-5 An unlevered firm has a value of $800 million. An otherwise identical but levered firm has www.Model with $60 million in debt. Under the MM zero-tax model, what is the value of the levered firm? Zero arey 12-6 An unlevered firm has a value of $600 million. An otherwise identical but levered firm has wMModel with 5120 million in debt. If the corporate tax rate is 30% , what is the value of the levered firm orporate Toxes using the MM corporate-tax model? 12-7 An unlevered firm has a value of $600 millign wth Corporate has 5240 million in debt. U Personal Taxes corp

Answer 1

Unlevered beta = levered beta / (1 + (1 - tax rate) * (debt / equity))

The company is financed with 40% debt. Therefore the remaining 60% is equity.

Unlevered beta = 0.75 / (1 + (1 - 30%) * (40% / 60%))

Unlevered beta = 0.5114.