Business and Financial Risk Assume a firm’s debt is risk-free, so that the cost of debt equals the risk-free rate, R f . Define b A as the firm’s asset beta—that is, the systematic risk of the firm’s assets. Define b S to be the beta of the firm’s equity. Use the capital asset pricing model, CAPM, along with MM Proposition II to show that b S 5 b A 3 (1 1 B y S ), where B y S is the debt–equity ratio. Assume the tax rate is zero.