Question

If a firm increases its use of both operating and financial leverage, then you should expect the firm's: Multiple Choice asset beta to exceed its equity beta. beta of debt to exceed 1.0. beta to remain constant as the increased operating leverage will offset the increased financial leverage. equity beta to increase.

Answer 1

Answer:

equity beta to increase

Explanation:

Operating leverage is the method which determines the sensitivity to company's fixed cost. Financial leverage determines the extent to which debt is used finance business operations. When financial leverage increases its gives rise to equity beta. Asset beta is the unlevered beta and equity beta is the levered beta. Equity beta considers different level of debt and incorporates the risk factor into it.