Hello, schweser book 2 page 59, it says firm equity beta / firm asset beta =(1+D/E) and the conclusion is debt-equity ratio increases, its equity beta increases… it sounds like firm asset beta desn’t change… I got confused because I think it makes a lot more sense to say debt/equity increases, then the firm asset beta decreases! please help! thanks!
When a company increases its leverage, its equity becomes more risky; hence, equity beta goes up… which is why, if it’s a private company, people go through the process of unlevering beta of the public peer companies to come up with a comparable beta