Section A

Alpha Co is an all-equity financed company with an equity beta of 1.2. It plans to change its capital structure to 30% debt and 70% equity. The risk-free rate is 4% and the market risk premium is 6%. Corporation tax is 20%.

Assuming debt is risk-free (debt beta = 0), what will be Alpha Co's new equity beta after the gearing change?

1. Because Alpha Co is currently all-equity, its Asset Beta (Ba) equals its Equity Beta (Be) = 1.2. 2. We need to re-gear this beta to reflect the new financial risk. The formula is: Be = Ba * [1 + (Vd/Ve) * (1 - t)]. 3. Vd = 30, Ve = 70. Tax (t) = 0.20. 4. Be = 1.2 * [1 + (30/70) * (1 - 0.20)] 5. Be = 1.2 * [1 + (0.42857 * 0.8)] 6. Be = 1.2 * [1 + 0.34286] = 1.2 * 1.34286 = 1.611 (rounds to 1.61).