I was reviewing the calculation for adjusting pension beta and noticed they don’t seem to take the firm’s debt into account when doing the calculation. They do risk free + beta(risk premium) = WACC Why don’t you include the firm’s debt when calculating WACC?

It assumes that the beta of debt is 0.

and yes forget that formula we learned last year where you take the %'s and after tax cost of debt. that doesnt exist on this Level.

just CAPM the WACC

no WACC, no CAPM.

They are talking about using the calculated operating beta to determine they WACC for decision purposes. They talk about debt in the qualitative material, but its not included in the WACC calculation. It makes no sense to me, but if that’s the way its calculated that’s what I’ll do during the exam

This section makes no sense to be too. The interaction between operating beta, equity beta and pension beta appears to be highly abstract. Not enough examples to figure out how to apply in real life (as if the rest of the text can be applied in real life … haha)

ditto. It assumes that a change of one variable[pension asset beta] affects another variable only…In reality, it’s different story.

debt is always factored but the BETA is 0. Therefore it doesn`t come into play. Doesn`

t mean you don`t consider it beacuset he operating assets and are increased on both the equity side AND the debt side to adjust the % of assets to equity. WACC= Rf + adjusted beta(EP).