EZCUBE Corp. is 50% financed with long-term bonds and 50% with common equity. The debt securities have a beta of .15. The company’s equity beta is 1.25. What is EZCUBE’s asset beta?
Beta is a measure of market risk. Unlevered beta (or asset beta) measures the market risk of the company without the impact of debt.
'Unlevering' a beta removes the financial effects of leverage thus isolating the risk due solely to company assets. In other words, how much did the company's equity contribute to its risk profile.
The signature of the function should be like:
def asset_beta(E, D, V, Bd, Be):
Use the following formula,
Asset beta = Bd* (D/V) + Be * (E/V)
Where,
E=Market value of the firm’s equity D=Market value of the firm’s debt V=E+D Bd= Debt security beta Be= Equity Beta
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