Allocation shareholder capital to pension plans, Confused Because, capital, equity, increase, 2011

cjs238

Reading 22 Questions:"Firm: As D/E increase, risk increases. Because Equity Beta = (1+D/E)* Firm Beta"

Why we judge risk by equity Beta not Firm Beta?



Edited 1 time(s). Last edit at Saturday, April 9, 2011 at 12:17AM by baifan.

strikethree

because shareholders hold equity positions?

Colum

As we consider firm's risk, we only means the risk of the shareholders?

Iginla2011

As we consider firm's risk, we only mean the risk of the shareholders?

thommo77

I havent looked at this question. However, consider this scenario.

Same firm
1. 99% debt
2. 0% debt

If only considering asset beta, you would think each scenario would have equal risk. Obviously, it doesn't. Capital structure definitely plays a role in a firm's risk.