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Movie Inc., an entertainment conglomerate, has a beta of 1.60. Part of the reason for the...

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Finance

Movie Inc., an entertainment conglomerate, has a beta of 1.60.Part of the reason for the high beta is the debt left over from theleveraged buyout of Pic Inc. in 2009, which amounted to $10 billionin 2014. The market value of equity at Movie Inc in 2014 was also $10 billion (and the book value of equity was also $10 billion). Themarginal tax rate was 40%.

  1. Estimate the unlevered beta for Movie Inc.
  1. Estimate the effect of reducing the debt ratio (TotalDebt/Total Assets) by 10% each year for the year (for example ifthe debt ratio was 40% it will be reduced to 30%) on the beta ofthe stock. Assume that Movie Inc has no short-term debt (i.e.TD=TL).

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4.0 Ratings (402 Votes)
Unlevered beta of Movie Inc 16 MV of debt 10 billion MV of equity 10 billion So DE ratio 1 a We know that unlevered beta levered beta1 1tDE So unlevered    See Answer
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Movie Inc., an entertainment conglomerate, has a beta of 1.60.Part of the reason for the high beta is the debt left over from theleveraged buyout of Pic Inc. in 2009, which amounted to $10 billionin 2014. The market value of equity at Movie Inc in 2014 was also $10 billion (and the book value of equity was also $10 billion). Themarginal tax rate was 40%.Estimate the unlevered beta for Movie Inc.Estimate the effect of reducing the debt ratio (TotalDebt/Total Assets) by 10% each year for the year (for example ifthe debt ratio was 40% it will be reduced to 30%) on the beta ofthe stock. Assume that Movie Inc has no short-term debt (i.e.TD=TL).

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