This is really confusing and conflicting.
Let say we increase equity investing in pension asset. This will lead to increasing Pension asset beta and also the Total asset beta and the firm overall equity risk.
Here they say we can avoid this from happening by decrease D/E ratio, this means increase Equity weight.
According to the 2 below fomular, this is not true
1) Beta(equity) = Beta (operating asset) ( 1+ D/E) . This means hold Beta equity constant, decrease D/E will increase operating asset beta –>increase firm risk –> Increase WACC
2) Total asset beta = Weight Equity * Beta equity (because beta of debt = 0)
So Decrease D/E means Increase in Equity weight –> Increase total asset beta –> Increase firm risk
I dont see how decrease D/E ratio can help to offset the effect from increase equity investing in Pension asset??
Anyone can explain this, please?