Levered beta includes both business risk and the risk that comes from taking on debt. However, since different firms have different capital structures, unlevered beta is calculated to remove additional risk from debt in order to view pure business risk. The average of the unlevered betas is then...
Debt financing is more tax-efficient than equity financing since interest expenses are tax-deductible and dividends on common shares are paid with after-tax dollars. However, too much debt can result in dangerously high leverage levels, forcing the company to pay higher interest rates to offset th...
The final-good firm's production function specifies positive cross-partial derivatives for capital and IT, so its value, as well, is higher than its steady state value. The price- dividend ratios converge to their steady-state levels nearly 10 years before the IT-capital ratio, highlighting ...