What happens to the value of levered beta when more debt is added?

When more debt is added to a firm's capital structure, the value of levered beta generally increases due to the associated higher risk. Levered beta measures a company's risk in relation to the market, taking into account the impact of debt. Essentially, as a firm takes on more debt, its financial risk increases because debt obligations must be met regardless of the company's operational performance. This added risk makes the company's equity more volatile in comparison to the market, causing the levered beta to rise.

As debt increases, the potential for higher returns exists; however, this comes with increased volatility and risk for equity holders. Therefore, the firm's beta will reflect this higher level of systematic risk, indicating that equity holders now face greater financial uncertainty. Thus, adding debt effectively amplifies both the firm's potential returns and its risk, leading to an increase in levered beta.