Business and Financial Risk. Assume a firm's debt is risk-free, so that the cost of debt equals

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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 B, as the firm's asset beta-that is, the systematic risk of the firm's assete Define Be to be the beta of the firm's equity. Use the capital asset pricing model (CAPM) along with M&M Proposition Il to show that Be = B. x (1 + D/E), where D/E is the debt-equity ratio. Assume the tax rate is zero.

Posted Date: May 19, 2024 06:05 AM

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Business and Financial Risk. Assume a firm's debt is risk-free, so that the cost of debt equals

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