Big City Lumber Inc. has a levered beta of 1.70, a debt-equity ratio o
Big City Lumber Inc. has a levered beta of 1.70, a debt-equity ratio of 0.40, and a tax rate of 25%. What is the value of the firm’s unlevered beta?
A) 0.78
B) 1.00
C) 1.31
D) 1.70
ANSWER
C
Explanation: C) βU = βL / (1 + (D/E) (1-t)) = 1.70/(1 + .40(1-.25)) = 1.31.
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