Asset Beta Calculation

How to calculate a firm's asset beta?

If a firm has $10 million of debt with a debt beta of .4 and $30 million of equity with equity beta of 2, then the firm's asset beta is ____. a) 0.8 b) 1.2 c) 1.6 d) 2.0

Answer:

The firm's asset beta can be calculated using the debt beta and equity beta, and the firm's debt and equity values.

To calculate a firm's asset beta, you can use the following formula:

Asset Beta = (Debt / (Debt + Equity)) * Debt Beta + (Equity / (Debt + Equity)) * Equity Beta

Given the information provided in this case, the firm's total debt is $10 million and its total equity is $30 million. Therefore, the total value of the firm's assets is $40 million ($10 million + $30 million).

Plugging these values into the formula:

Asset Beta = (10 / 40) * 0.4 + (30 / 40) * 2

Asset Beta = 0.25 * 0.4 + 0.75 * 2

Asset Beta = 0.1 + 1.5

Asset Beta = 1.6

Therefore, the firm's asset beta is 1.6. The correct answer is c) 1.6.