Answer: 3.7
Explanation:
From the question, we are informed that the beta of an all equity firm is 1.6, thee beta of debt is 0.2 and further that the firm changes its capital structure to 60% debt and 40% equity using 10% debt financing.
The beta of the levered firm will be calculated as:
= Beta unlevered + (Beta unlevered - Beta debt) × D/E
= 1.6 + [(1.6-0.2) × 60/40]
= 1.6 + [1.4 × 1.5]
= 1.6 + 2.1
= 3.7
Answer is B. 3.7
