Two Firms Have the Same Operating Structure and the Same

question 22

Multiple Choice

Two firms have the same operating structure and the same operating systematic risk, ß = .8. firm 1 has 20% debt in their capital structure while Firm 2 has four units of debt for every 7 units of equity. The tax rate faced by both firms is.4. The debt beta is assumed to zero. What is the difference in systematic risk between the riskier firm and the less risky firm?

• A) 0.26 Firm 2 beta greater than Firm 1 beta.
• B) 0.15 Firm 2 beta greater than Firm 1 beta.
• C) 0.30 Firm 2 beta greater than Firm 1 beta.
• D) 0.10 firm 2 beta greater than Firm 1 beta.

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Definitions:

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