If the debt beta is zero, then the relationship between the equity beta and the asset beta is given by
A)equity beta = 1 + [(beta of assets)/(debt-equity ratio)].
B)equity beta = (1 − debt-equity ratio)(beta of assets).
C)equity beta = (1 + debt-equity ratio)(beta of assets).
D)equity beta = 1 + (debt-equity ratio/ beta of assets).

Question

Quizplus · Accepted Answer

The correct relationship when the debt beta is zero is given by the formula: equity beta = asset beta * (1 + debt-equity ratio). This formula is derived from the Modigliani-Miller proposition on the relationship between the betas of equity, debt, and assets, assuming no taxes and that the debt beta is zero.

If the Debt Beta Is Zero, Then the Relationship Between