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2. Name the 3 main influences on beta, and therefore cost of capital. From a business...

2. Name the 3 main influences on beta, and therefore cost of capital.

From a business perspective

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Answer #1

ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

Beta represents => Systematic Risk/Non-diversifiable risk/Market risk:

1. Risk related to the economy.

2. Cannot be killed by diversification.

For Example:

1. Suppose a war is declared between two countries.

2. Government decisions / New political party coming into power.

3. The risk due to the cyclic nature of Industry.

4. Interest rate, Inflation fluctuation risk.

3 main influences on Beta:

Lower the cyclic nature of the business(pharmaceuticals and fast-moving consumer goods), lower the beta.

Lower financial risk (low debt to equity ratio), lower the beta.

Lower the Operating leverage (lower the effect on cyclicity), lower the beta.

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