Hello. Required clarification on below two contradicting statements on schweser book: 1. The equity beta of the firm is asset beta levered by debt on the balance sheet. 2. Debt beta is assumed to be zero. Now if debt beta is zero, then increasing the debt should reduce the equity beta, because equity component weight will reduce. Also, for statement 1, should equity beta drive asset beta or vice versa? plz help…
For statement 2., the more debt the company has, the more risky it is. High D/E ration is more unfavorable, hence high beta assigned to the company. It works the other way around the pension management, you invest in more debt, the portfolio is less sensitive and thus lower beta.