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Unlevered Beta to Levered Beta

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  • This topic has 2 replies, 2 voices, and was last updated Mar-18 by Aasim.
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    • Aasim
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      Forum Level 1 Summer Associate
      14 Mar 2018 at 9:28 am
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      Greetings everyone,

      I’m on reading 36 – Cost of Capital, example 13 in the Corporate Finance-Portfolio Management CFAI books.

      http://tinypic.com/r/essz04/8

      Do you have any idea how the beta is 1.28 for the fourth answer?

      I understand the formula would be .90*(1+(1-.36)(X)…I’m having a hard time finding what X is.

      Thank you very much.

    • rsparks
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      Forum Level 2 Associate
      15 Mar 2018 at 3:28 am
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      You nearly have it.

      you need to find the asset beta.

      when d/d+e = .4

      for every dollar .4 = d, which means .6 = e

      Asset B= .9 [1+ (1-.36)(.4/.6)] = 1.28

      i believe you were taking .4/1.4 instead of .4/.6

      hope this helps,

      Ron

    • Aasim
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      Forum Level 1 Summer Associate
      15 Mar 2018 at 9:16 am
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      Thank you very much rSparks!

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