Hartman Motors has $15 million in assets, which were financed with $6 million of debt and $9 million in equity. Hartman's beta is currently 1.4, and its tax rate is 30%. Use the Hamada equation to find Hartman's unlevered beta, bU. Do not round intermediate calculations. Round your answer to two decimal places.

Unlevered beta ≈ 1.09

Step-by-step explanation:

Unlevered beta is basically the unlevered weighted average cost as it shows the volatility of returns without financial leverage. Unlevered beta is also known as asset beta, while the levered beta is commonly known as equity beta. Unlevered beta is calculated from the hamada equation as:

Unlevered beta = Levered beta/[1 + ((1 - Tax rate) × (Debt / Equity))]

We are given;

Levered beta = 1.4

Tax rate = 30% = 0.3

Debt = $6 million

Equity = $15 million

Thus, plugging these into the hamada equation, we have;

Unlevered beta = 1.4/[1 + ((1 - 0.3) × (6/15))]

Unlevered beta = 1.4/(1 + (0.7 × 0.4)

Unlevered beta = 1.4/(1 + 0.28)

Unlevered beta = 1.4/1.28

Unlevered beta = 1.09375

To 2 decimal places;

Unlevered beta ≈ 1.09

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step-by-step explanation: