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5 October, 14:38

A company's beta (from the CAPM) is affected by its capital structure. a. True b. False

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  1. 5 October, 14:41
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    True

    Explanation:

    We know that

    Risk-free rate of return = Risk-free rate of return + Beta * (Market rate of return - Risk-free rate of return)

    where,

    The Market rate of return - Risk-free rate of return) is also known as the market risk premium and the same is applied.

    Plus we know that the capital structure is composed of debt and equity. If the debt is increasing, the market risk is also increased, and therefore the volatility is also increasing.

    The beta is the volatility which can affect due to market movements so it automatically affect the capital structure
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