I am confused by the schweser notes What is the difference between all of these betas? -Asset beta, is this the same as the unlevered beta of the firm?? -How is a debt beta calculated?? -Whats the difference between overal asset beta when compared to operating or balance sheet beta?? I imagine if I still had my level 2 books, i would know this.
debt beta is 0. debt is not correlated with the equity mkts. overall asset beta remains the same but equity beta decreases when you add pension assets and liabilities to the balance sheet.
say pension is 50/50 debt equity, now its 100% equity, you want to keep your equity beta constant what happens to D/E, equity assets, and firm asset beta?
decreases the D/E & total asset beta
man this is not Level 2 stuff. I had overlooked that as well. it’s squeezed at the end of SS 5. I expect a question on that subject.
I highly doubt calculations will be needed for this on the test. COnceptually, once you get it is very simple. The opertaing asset beta is a plug number, and assuming a company wants to maintain a stable total asset beta (aka firm beta) , they willl have to adjust operating asset beta for changes in pension beta. If pension beta increases, you must decrese operating asset beta to maintain a s tsbale total asset beta. To decrease operating asset beta you must delevarge operating sied of acqusition, so debt/equity levels decrase. If pension beta decreases, you must increase opertainga sset beta by leveraging up, thus increaisng debt/equity. Core idea here is more leverage increase risk of firm and increases beta of operating assts Does any thing we will actually have to do calcs on this?