How does leverage impact a company's beta?

Leverage impacts a company's beta by affecting the relationship between the company's systematic risk and its capital structure. Specifically, when a company takes on debt, its levered beta, which reflects the risk of the company's equity considering its debt levels, typically increases compared to its unlevered beta, which represents the company's risk without debt.

Higher financial leverage means that the company is subject to greater financial risk. Consequently, as it increases its debt, the variability of its equity returns increases as well. This leads to a situation where the levered beta is equal to or greater than the unlevered beta, reflecting the additional risk shareholders are exposed to due to the financial obligations and potential fluctuations in earnings associated with higher debt levels.

Understanding this relationship helps in assessing how sensitive a company's stock price is to market movements. Thus, the correct answer highlights the fundamental principle that leverage magnifies the risk profile of a company, thereby increasing its levered beta in relation to its unlevered beta.