The asset beta of a firm equals its equity beta if:
a. the company has no debt
b. the company has no equity
c. the company's debt equals its equity
The correct answer was A).
The formula for the asset beta is:
Asset Beta = Equity Beta (1/(1+((D/E)(1-t)))
Therefore, the two betas are identical only if the company has no debt in its capital structure (D = 0). If the company has no debt, then the asset beta must equal the equity beta.
I don't understand why the answer cannot also be B (E=0)?
Thanks!作者: JPSem 时间: 2011-7-11 19:45
Logically, If the firm has no equity, what is equity beta?作者: amqata 时间: 2011-7-11 19:45
Well - to think about it, that would still make asset beta equal to equity beta didn't think about it but got the answer correct作者: agulani 时间: 2011-7-11 19:45
Any other thoughts? I'm still confused.作者: johnnyBuz 时间: 2011-7-11 19:45
the assumption is that the denominator (E) cannot be zero作者: kmf229 时间: 2011-7-11 19:45
If you try lim(E->0), B(asset)->0.
Similarly, as you said, B(eqty x)=cov(x,m)/(sigma(m)^2)->0 as E->0.
Thus, it looks to me that (b) should be accepted, too.作者: dotamasta 时间: 2011-7-11 19:45
Uh, debt magnifies (levers) equity beta as a multiple of asset beta, so lim(E->0) EquityBeta -> infinity.
So b doesn't work.
Edited 2 time(s). Last edit at Wednesday, November 24, 2010 at 12:21AM by bchadwick.
didn't think about it but got the answer correct