A firm's assets have a beta of 1.0. Assuming that the debt beta equals 0.0 and that there are no taxes, calculate the firm's equity beta under the following assumptions:

a. The firm's capital structure is 100% equity.

b. The capital structure is 20% debt and 80% equity.

c. The capital structure is 40% debt and 60% equity.

d. The capital structure is 60% debt and 40% equity.

e. The capital structure is 80% debt and 20% equity.

Do you believe that the assumption of a zero debt beta is equally valid for each of these capital structures? Why or why not?

Answer rating: 100% (QA)

We know that Beta assets Beta equity EquityEquity Debt1tax Beta debt Debt1taxEquity Debt1tax Since t... View the full answer