The β of all equity firm versus the β of the same firm with leverage is different:
A) by the impact of business risk.
B) by the β of the assets.
C) because the β of the assets are not exposed to financial leverage.
D) because the β of the assets are exposed to financial leverage.

Question

Quizplus · Accepted Answer

The β of the assets are not exposed to financial leverage. Business risk only affects the β of equity, whereas financial risk triggered by leverage only affects the equity portion of the firm's capital structure. The beta of the assets remains constant in both cases. Therefore, leverage does not affect the beta of the assets, and the answer is C.

The β of All Equity Firm Versus the β of the Same