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Consider a firm that historically has been continuously rebalancing its debt-to-value ratio to 30%. Today, the firm decides to increase its debt-to-value ratio to 50%,

Consider a firm that historically has been continuously rebalancing its debt-to-value ratio to 30%. Today, the firm decides to increase its debt-to-value ratio to 50%, and plans to continuously rebalance to this new ratio in the future. Suppose the debt beta and the asset beta are unaffected by this change, and that the asset beta is larger than the debt beta. As a result of this increase in leverage,

a.

The equity beta increases

b.

The equity beta falls

c.

The equity beta stays unchanged

d.

The equity beta could go up or down

e.

None of the above

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