All else equal when a companys debt ratio rises its beta fal

All else equal, when a company\'s debt ratio rises, its beta falls.

True

False

Solution

False: All else equal, when a company\'s debt ratio rises, its beta falls.

The firm increasing its debt ratio will have higher beta. Before debt firm is unlevered, as debt get added the firm becomes levered firm. The leverage bring more return to equity with added volatility to equity hence the beta at overall level increases because it represents the systematic risk measure.