Which of the following equations would NOT be appropriate to use in a firm with risky debt? A)β_E = β_U + β_U B)β_U = β_E+ (β_U - β_D) C)β_E = β_U + (β_U - β_D) D)β_U = β_E + β_D

Question

Quizplus · Accepted Answer

The equation in choice A is not appropriate because it incorrectly suggests that the beta of equity in a levered firm (with risky debt) is a simple sum of betas, which does not account for the impact of financial leverage on the risk profile of equity. The correct equations (B, C, and D) reflect adjustments for the effects of leverage and the risk of debt on the equity beta.

Which of the Following Equations Would NOT Be Appropriate to Use