A firm currently has no debt and the beta on the equity is 1.0. There are no corporate taxes or personal taxes. If the firm chooses a new debt-equity ratio of 0.2, the beta on its equity should be equal to. A) 0.6 B) 0.8 C) 1.0 D) 1.2 E) 1.4
Added by Anthony B.
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This is because the firm now has fixed obligations (interest payments on the debt) that it must meet, which increases the riskiness of the firm's equity. The formula to calculate the leveraged beta (beta of equity) is: Beta_leveraged = Beta_unleveraged * (1 + (1 Show more…
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