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John Moffat.
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Syed Ahsan Ali
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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?
John Moffat
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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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