Business and Financial Risk Assume a firm’s debt is risk-free, so that the cost of debt equals the risk-free rate, Rf. Define A as the firm’s asset beta—that is, the systematic risk of the firm’s assets. Define 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 S  A  (1
BS), where BS is the debt–equity ratio. Assume the tax rate is zero.

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