The Asset Beta of a Levered Firm Is 1

question 16

Multiple Choice

The asset beta of a levered firm is 1.1.The beta of debt is 0.3.If the debt equity ratio is 0.5,what is the equity beta? (Assume no taxes.)

• A)1.5
• B)1.1
• C)0.3
• D)0.15

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Definitions:

Variable Overhead Rate

Variable overhead rate is the cost of variable overhead (expenses that change with the level of production) allocated per unit of production activity, such as labor-hours or machine-hours.

Direct Labor-Hours

The total hours worked by employees who are directly involved in the manufacturing process or production of goods.

Fixed Manufacturing Overhead

Indirect manufacturing costs that remain constant regardless of the level of production, such as factory rent and salaries of production supervisors.

Variable Overhead Rate

This rate is used to apply the variable overhead costs to production activities, based on an activity base.