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Assuming that the beta of debt is zero will understate the financial risk when ungearing an equity beta.
The answer says the difference between equity beta and asset beta will be even higher if this happens. My question is why would we even care about the financial risk when ungearing because we intend to find the pure business risk?When there is gearing, the equity beta is higher than the asset beta because of the extra risk due to the gearing.
The asset beta measures the risk due purely to the nature of the business, and if we want to know the level of business risk we need to ungear the equity beta.
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