A firm is currently financed with $400 of debt and $600 of equity

Finance Dec 26, 2020

A firm is currently financed with $400 of debt and $600 of equity. The expected return on the debt is 5%. The market beta of the firm's equity is 1.2; the risk-free rate is 2%; and the equity premium is 6%. The firm pays taxes at the marginal rate of 40%. The firm is considering increasing its debt to $600 and using the funds to repurchase some of its stock. This is likely to change the expected return on debt to 7%. Using same WACC above, what will the new market beta of the firm's equity be? Round your answer to the nearest tenth. O 1.4 O 1.2 Not determinable O 1.0

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