2. DTS has Same Risk as the Firm's Assets

Let's start with the assumption that the firm's DTS falls in the same risk class as the assets (βA). As we have discussed before, this assumption is appropriate for firms that pursue a specific target capital structure (in % of firm value). 

This chapters discusses the following:

  • How to unlever and relever the betas under this assumption
  • The implication for the estimation of WACC
  • A comparison with our previous approach to unlever and relever the cost of capital instead of the betas.