Business and Financial Risk Assume a firm’s debt is risk-free, so that the cost of d...

Business and Financial Risk Assume a firm’s debt is risk-free, so that the cost of debt equals the risk-free rate, as the firm’s asset beta—that is, the systematic risk of the firm’s assets. Define to be the beta of the firm’s equity. Use the capital asset pricing model, CAPM, along with MM Proposition II to show that where B / S is the debt–equity ratio. Assume the tax rate is zero.