Let's say we want to derive the Beta of an asset given the Beta of the
equity (B_E) and the leverage. If B_E = .76 and the leverage = 12%
what is the B_A? and what is the overall formula used to derive this answer?

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Clarification of Question by pirate01-ga on 26 Jul 2004 07:00 PDT

Our company has debt. This is indicated by the 14% leverage in the
problem statement.

beta_assets = beta_debt* (debt/value) + beta_equity* (equity/value)

This answer did not answer the question. remember we said we are only
given the lverage and the beta of the equity. We are not given the
beta of the debt as this answer idicates.

Pirate --

Nringo steered you correctly.  Some assumptions must be made about the
beta of debt.  Often in capital-asset models, it's that beta of debt
is zero or that the firm is unlevered.

Why is the beta of debt zero?  Debt is substantially less-risky than
equity, since returns are paid first to bondholders.  Changes in
investment policy to make the firm "riskier" get reflected in the
stock and its beta first, so assuming the beta of debt to be zero is
easy.  Plus it's the only way to solve most CAPM problems!

Google search strategy:
"beta of debt" + assumptions

Best regards,

Omnivorous-GA