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.

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.

Colum

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

strikethree

because shareholders hold equity positions?