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A firm's assets have a beta of 1.0. Assuming that the debt beta equals 0.0 and that there are no taxes, calculate the firm's equity
A firm's assets have a beta of 1.0. Assuming that the debt beta equals 0.0 and that there are no taxes, calculate the firm's equity beta under the following assumptions:
a. The firm's capital structure is 100% equity.
b. The capital structure is 20% debt and 80% equity.
c. The capital structure is 40% debt and 60% equity.
d. The capital structure is 60% debt and 40% equity.
e. The capital structure is 80% debt and 20% equity.
Do you believe that the assumption of a zero debt beta is equally valid for each of these capital structures? Why or why not?
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