Nestle has a Beta of 1.

1 at a Debt Ratio of 25% and

Cadbury has a Debt Ratio of 40% and a Beta of 1.3.
The tax Rate is 30%.
Step 1: Unlevering: Finding unlevered Beta
Nestle
BL = Bu (1+ ((1-t)D/E))
1.1 = Bu (1 + (1-0.3)1/3)
1.1 = Bu (1 + 0.233)
1.1 = Bu (1.233)
Bu = 0.89

Cadbury
BL = Bu (1+ ((1-t)D/E))
1.3 = Bu (1 + (1-0.3)4/6)
1.3 = Bu (1 + 0.4669)
1.3 = Bu (1.4669)
Bu = 0.88

Unlevered Beta of Chocolate Business =Average of

0.88 + 0.89 = 0.885

Suppose your company wants to have a Debt Ratio

of 85%

Step 2: Relevering: Finding levered beta for your

company
BL = Bu (1+ ((1-t)D/E))
BL = 0.885 (1 + (1-0.3)35/65)
BL = 0.885 (1 + (1-0.3).538)
BL = 0.885 (1 + 0.376)
BL = 0.885 (1 .376)
BL = 1.218

Nestle has a Beta of 1.1 at a Debt Ratio of 25%. It

wants to increase its debt ratio to 35%.
The tax Rate is 30%.
Step 1: Unlevering: Finding unlevered Beta
BL = Bu (1+ ((1-t)D/E))
1.1 = Bu (1 + (1-0.3)1/3)
1.1 = Bu (1 + 0.233)
1.1 = Bu (1.233)
Bu = 0.89
Step 2: Relevering: Finding levered beta at new
debt ratio
BL = Bu (1+ ((1-t)D/E))
BL = 0.89 (1 + (1-0.3)35/65)
BL = 0.89 (1 + (1-0.3).538)
BL = 0.89 (1 + 0.376)
BL = 0.89 (1 .376)
BL = 1.22