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Estimate the effect of reducing the debt ratio

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Question: Time Warner Inc., the entertainment conglomerate, has a beta of 1.61. Part of the reason for the high beta is the debt left over from the leveraged buyout of Time by Warner in 1989, which amounted to $10 billion in 1995. The market value of equity at Time Warner in 1995 was also $ 10 billion. The marginal tax rate was 40%.

a. Estimate the unlevered beta for Time Warner.

b. Estimate the effect of reducing the debt ratio by 10% each year for the next two years on the beta of the stock.

Reference no: EM131683025

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