Simpson Department Store Simpson Department Stores Operates Retail Department Store Chains Throughout the Chains

Simpson Department Store
Simpson Department Stores operates retail department store chains throughout the United States.At the end of Year 10,Simpson reports debt of $4,658 million and common shareholders' equity at book value of $4,323 million.The market value of its common stock is $6,905,and its market equity beta is .89.An equity buyout group is considering an LBO of Simpson as of the beginning of Year 11.The group intends to finance the buyout with 20 percent common equity and 80 percent debt carrying an interest rate of 11 percent.
Regarding the equity buyout,compute the unlevered market equity (asset)beta of Simpson before consideration of
the LBO.Assume that the book value of the debt equals its market value.The income
tax rate is 35 percent.

Correct Answer:

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.89 = X[1 ...

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