White’s World Wide Delivery Inc. has an unlevered beta = 1.25, a debt-

White’s World Wide Delivery Inc. has an unlevered beta = 1.25, a debt-equity ratio of 0.30, a tax rate of 0.20, and a levered beta = 1.55. If the firm increased the debt-equity ratio to 50%, what would be the impact on the levered beta?

A) Increase to a value of 1.75
B) No change in value.
C) Decrease to a value of 1.00
D) There is insufficient information to make a levered beta estimate.

ANSWER

A
Explanation: A) βL = (1+(D/E)(1-t))* βU
= (1+(.50)(1-.20)*1.25 = 1.75.