If beta of debt is zero, then the relationship between equity beta and 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) None of the above

Question

Quizplus · Accepted Answer

When the beta of debt is zero, the equity beta is calculated by adjusting the asset beta for the financial leverage, which is represented by the debt-equity ratio. The correct formula is equity beta = (1 + Debt-equity ratio)(beta of assets).

If Beta of Debt Is Zero, Then the Relationship Between