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Describe use of the capital asset pricing model

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Question: Business and Financial Risk. Assume a firm's debt is risk-free, so that the cost of debt equals the risk-free rate, Rf . Define βA as the firm's asset beta-that is, the systematic risk of the firm's assets. Define βE to be the beta of the firm's equity. Use the capital asset pricing model (CAPM) along with M&M Proposition II to show that βE = βA × (1 + D/E), where D/E is the debt-equity ratio. Assume the tax rate is zero.

Reference no: EM131732908

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