Levered Beta Calculator Formula

Unlevered Beta Formula:

\[ \text{Unlevered Beta} = \frac{\text{Levered Beta}}{1 + (1 - \text{Tax Rate}) \times \frac{\text{Debt}}{\text{Equity}}} \]

Levered Beta:

unitless

Tax Rate:

Debt:

currency units

Equity:

currency units

Unlevered Beta:

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1. What is the Unlevered Beta Formula?

The Unlevered Beta formula calculates the beta of a company without the effects of debt, providing a measure of the company's systematic risk relative to the market. It removes the financial risk component to focus solely on business risk.

2. How Does the Calculator Work?

The calculator uses the Unlevered Beta formula:

\[ \text{Unlevered Beta} = \frac{\text{Levered Beta}}{1 + (1 - \text{Tax Rate}) \times \frac{\text{Debt}}{\text{Equity}}} \]

Where:

Levered Beta — The company's beta with debt included (unitless)
Tax Rate — Corporate tax rate as a percentage
Debt — Total debt of the company (currency units)
Equity — Total equity of the company (currency units)

Explanation: The formula adjusts the levered beta by removing the effects of financial leverage, providing a clearer picture of the company's pure business risk.

3. Importance of Unlevered Beta Calculation

Details: Unlevered beta is crucial for comparing companies with different capital structures, estimating cost of equity for projects, and conducting company valuations. It helps investors understand the inherent business risk separate from financing decisions.

4. Using the Calculator

Tips: Enter levered beta as a positive number, tax rate as a percentage (0-100), debt and equity in consistent currency units. All values must be valid (levered beta > 0, tax rate between 0-100, debt ≥ 0, equity > 0).

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between levered and unlevered beta?
A: Levered beta includes both business risk and financial risk from debt, while unlevered beta measures only the business risk of a company.

Q2: When should I use unlevered beta?
A: Use unlevered beta when comparing companies with different debt levels, estimating cost of equity for capital budgeting, or when analyzing pure business risk.

Q3: What are typical unlevered beta values?
A: Unlevered beta typically ranges from 0.5 to 1.5, with 1.0 representing average market risk. The exact value depends on the industry and business model.

Q4: How does tax rate affect the calculation?
A: Higher tax rates reduce the impact of debt on beta, as interest expense provides a tax shield that lowers the effective cost of debt.

Q5: Can unlevered beta be negative?
A: While theoretically possible, negative unlevered beta is extremely rare and would indicate that the asset moves opposite to the market.