Comparing two otherwise equal firms, the beta of the common stock of a levered firm is ____________ than the beta of the common stock of an unlevered firm.
A)equal to
B)significantly less
C)slightly less
D)greater
E)None of the above.

Question

Quizplus · Accepted Answer

The beta of a levered firm is greater than that of an unlevered firm because the presence of debt in the firm's capital structure increases the firm's financial risk and, therefore, the systematic risk of the common stock. This increase in systematic risk leads to a higher beta for the levered firm's common stock.

Comparing Two Otherwise Equal Firms, the Beta of the Common