A company has an equity beta of 1.4 and is 60% funded with debt. Assuming a tax rate of 35%, the company’s asset beta is closest to:
A is correct. Note: 60% debt financing is equivalent to a D/E ratio of 1.50 = 0.60/(1 – 0.60).
β Asset = β EQ × [1 ÷ (1+ [1 – t] D/E) )] = 1.4 ÷ (1 + (1 – 0.35) × 1.5) = 0.7089.