Consider a tree-growing company, Rapid Cedars, Inc., that is currently all equity and has a beta of .8. The firm has decided to move to a capital structure of one part debt to two parts equity. Because the firm does not plan to change its business operations, its asset beta should remain at .8. Assuming a zero beta for its debt, its equity beta would become:

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B PEquity = BAsset (1+) 1.2 = 8(1 + 1/2) If the firm had one part debt to one part equity in its capital structure, its equity beta would be: 1.6 = .8(1+1) However, as long as it does not change its business operations, its asset beta would remain at .8. The effect of leverage is to increase the equity beta.