Companies A and B are identical except for their capital structures.Company A is an all-equity company while Company B is levered.Given this,you can assume that Company B's equity beta is ________ Company A's beta and its debt beta is assumed to be ________.

Question

Quizplus · Accepted Answer

Leverage increases the risk (and therefore the beta) of a company's equity because debt holders have a priority claim on the company's cash flows. The equity holders' claim is riskier, hence the equity beta of the leveraged company (Company B) is greater than the all-equity company (Company A). Debt beta is typically assumed to be close to zero, especially if the debt is considered to be risk-free or has very low risk.

Companies a and B Are Identical Except for Their Capital