The asset beta of a firm equals its equity beta if: a. the company has no debt b. the company has no equity c. the company’s debt equals its equity The correct answer was A). The formula for the asset beta is: Asset Beta = Equity Beta (1/(1+((D/E)(1-t))) Therefore, the two betas are identical only if the company has no debt in its capital structure (D = 0). If the company has no debt, then the asset beta must equal the equity beta. I don’t understand why the answer cannot also be B (E=0)? Thanks!
Logically, If the firm has no equity, what is equity beta?
Zero?
Well - to think about it, that would still make asset beta equal to equity beta 
didn’t think about it but got the answer correct
Any other thoughts? I’m still confused.
the assumption is that the denominator (E) cannot be zero
If you try lim(E->0), B(asset)->0. Similarly, as you said, B(eqty x)=cov(x,m)/(sigma(m)^2)->0 as E->0. Thus, it looks to me that (b) should be accepted, too.
0/ any number = 0, any number/ 0 is undefined, not 0.
Uh, debt magnifies (levers) equity beta as a multiple of asset beta, so lim(E->0) EquityBeta -> infinity. So b doesn’t work.