With taxes, the equity beta of the levered ﬁrm is:

Question

Quizplus · Accepted Answer

The equity beta of the levered firm is negatively related to the level of debt (choice C) due to the increased financial risk associated with higher debt levels. Additionally, the equity beta is negatively related to the tax rate (choice B) since interest payments on debt are tax-deductible, which reduces the overall tax burden and therefore reduces financial risk. Therefore, both choices B and C are correct, resulting in choice D being the best option. Choice A is incorrect because the level of equity does not affect the equity beta.

With Taxes, the Equity Beta of the Levered ﬁRm Is