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Pranay Samariya
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Intermediate
Asked: 2020-12-17T15:37:47+05:30 In:

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Can you please explain this question?

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    1. Budhaditya Debnath Moderator
      Moderator

      It is a simple question on deleveraging and re-leveraging ( with n number of irrelevant stupid information given to confuse us and was therefore marked as ambiguous and timepass question in the class).

      Step 1 – Let us deleverage Proxy Equity Beta.

      Equity Beta of Proxy = 1.1

      Debt Equity Ratio = 1/4 = 0.25.

      Tax rate = 30%.

      Therefore, Asset Beta = 1.1/(1+0.25(0.7)) = 0.9362

       

      Step 2 – Re-leveraging XYZ’s Beta :

      Asset Beta = 0.9362

      Debt Equity ratio = 1/2 = 0.5

      Tax Rate = 30%.

       

      Therefore, Equity Beta = 0.9362(1+0.5(0.7)) = 1.264

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