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In the answer, when calculating the equity beta of the combined entity,why do not to consider tax impact? I think the right formula should be 0.351*(8.875*0.7+1.125)/1.125
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Return to the equity holders, i.e. dividends, is not a tax deductible item but interest payments are.
@oliviachen said:
In the answer, when calculating the equity beta of the combined entity,why do not to consider tax impact? I think the right formula should be 0.351*(8.875*0.7+1.125)/1.125Usually you would be correct.
However, according to the question, Polar Finance does not pay tax on its income.
This means that they get no tax benefit from debt finance, and therefore effectively T = 0 in the asset beta formula.Hope that helps!
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