A question from CFA textbook Book 4, Corporate Finance -
(P69) [question removed by admin]
Solution per textbook: B. The textbook also says, “Asset risk does not change with a higher debt-to-equity ratio. Equity risk rises with higher debt”.
My question: as we learned from the CFA textbook, Beta (asset) = Beta (equity) / [1+ [(1-t)*D/E]]. I guess I am sort of confused by this equation’s concept. Let’s say, for example, given the same D/E ratio, how do we know whether it’s the change in Beta (asset) lead to the change in Beta (equity), or vice versa? In addition, when the D/E ratio changes, how do we know whether the changes in D/E ratios impact Beta (asset) or Beta (equity) or both?
Anyone please help to explain… Thank you!!