Question: Assuming perfect capital markets:
Firm Xanc has a market beta for their equity of 1.2 and currently has a D/E ratio of 1.4. If you consider changing the D/E ratio to 1.6 how does this change the firm's equity beta (assume the beta of the debt is 0 when the D/E ratio is 1.4, but becomes 0.01 when the D/E ratio is 1.6)? Also figure out the new expected return of the equity if rm=.12 and rf=.04?