Question

Given the effect operating leverage and financial leverage have on the beta of a business/institution, which of these would you say has the highest beta? (You may have to do a quick Google search if you're unfamiliar with some of these institutions). Justify your answer. Although there is one 'more correct' answer, here you have enough room to defend your view.

a.

West Point Academy

b.

DePaul University

c.

Amherst College

d.

Harvard University

Answer 1

Operating leverage magnifies the effect of cyclicity on beta. Operating leverage increases as fixed costs rise and variable costs fall. Operating leverage refers to the sensitivity to the firm's fixed costs of production. ... Financial leverage always increases the equity beta relative to the asset beta.

It is better to use an unlevered beta over a levered beta when a company or investor wishes to measure a publicly-traded security's performance in relation to market movements without the effects of that company's debt factor.