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Debt Beta

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Debt Beta

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.
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  • May 6, 2021 at 1:04 am #619797
    Syed Ahsan Ali
    • Topics: 107
    • Replies: 66
    • ☆☆

    I watched your lecture on Beta where you said that Debt Beta is always assumed to be zero (I don’t know whether is this what I heard or not – but please correct me here) that is why we remove the calculation of Debt Beta from the calculation of Asset Beta formula.

    Is that correct?

    May 6, 2021 at 7:37 am #619822
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 49598
    • ☆☆☆☆☆

    Correct. In the exam we assume that debt is risk free and that therefore the debt beta is zero when using the asset beta formula.

    In real life, this is not true. Debt will carry a degree of risk and therefore will have a beta (although it will be a low beta because debt doesn’t carry much risk).

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