Faris Currently Has a Capital Structure of 40 Percent Debt

question 78

Multiple Choice

Faris currently has a capital structure of 40 percent debt and 60 percent equity, but is considering a new product that will be produced and marketed by a separate division.The new division will have a capital structure of 70 percent debt and 30 percent equity.Faris has a current beta of 1.1, but is not sure what the beta for the new division will be.AMX is a firm that produces a product similar to the product under consideration by Faris.AMX has a beta of 1.6, a capital structure of 40 percent debt and 60 percent equity and a marginal tax rate of 40 percent.If Faris' tax rate is 40 percent, estimate the levered beta for the new product division?

• A)2.44
• B)1.14
• C)2.74
• D)3.88

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Definitions:

Amylase Activity

The process by which the enzyme amylase breaks down starches into simpler sugars, a key step in carbohydrate digestion.

Starch

is a carbohydrate consisting of a large number of glucose units joined together, serving as a key energy source in many plants and diets.

Enzyme Catalyzes

Refers to the acceleration of a biochemical reaction by a protein enzyme.

Repeatedly

The act of doing something over and over again.