The Following Data Pertains to Zonk Corp -
Assume That Zonk Is a Potential Leveraged

Multiple Choice

The following data pertains to Zonk Corp., a manufacturer of ball bearings (dollar amounts in millions) :
$\begin{array}{llcc} \text { Total assets } &\$6,840 \\ \text { Interest-be aring debt } &\$3,562\\ \text { Average pre-tax borrowing cost } &11.5\%\\ \text {Common equity. } &\\ \text { Book value } &\$2,560\\ \text { Market value } &\$12,850\\ \text { Income tax rate} &35\%\\ \text { Market ecuity beta} &1.24\\\end{array}$
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Assume that Zonk is a potential leveraged buyout candidate. Assume that the buyer intends to put in place a capital structure that has 70 percent debt with a pretax borrowing cost of 14 percent and 30 percent common equity. Compute the revised equity beta for Zonk based on the new capital structure.

A) 1.24
B) 4.77
C) 4.34
D) 3.91