Exercise

Beta Unlevering Exercise

A firm that has more debt (i.e., higher leverage) is deemed to be riskier than a firm with lower debt, so the amount of debt the firm has relative to the level of its equity would be expected to have an impact on the firm's beta. All else equal, the higher the leverage, the higher the firm's beta. To compare the risk of the overall business (i.e., the assets of the company), we have to be able to remove the effects of the firm's leverage on each firm's beta. This process is known as "unlevering betas," because we are removing the leverage from the beta.

Using the Fernandez Formula from the video, unlever the Mylan beta (myl_beta) of 1.11 we previously calculated. In your calculations, assume that the Mylan debt-to-equity ratio (myl_debt_eq) is equal to 1.68, the relevant debt beta (debt_beta) is 0.08, and the tax rate is 40%.

Note: The Unlevered Beta using the Fernandez Formula is as follows:

\( (\beta_{MYL} + \beta_D (1 - 0.4) * D/E_{MYL}) / (1 + (1 - 0.4) D/E_{MYL}) \)

where the 0.40 is the assumed 40% tax rate

Instructions

100 XP
  • Calculate the Mylan Unlevered Beta.
  • Consider tax rate of 40%.