Calculate Unlevered Beta From Levered

Unlevered Beta Formula:

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

Levered Beta:

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Tax Rate:

Debt:

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Equity:

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Unlevered Beta:

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1. What is Unlevered Beta?

Unlevered Beta (also known as asset beta) measures the volatility of a company's returns without the impact of debt. It represents the systematic risk of a firm's assets, isolating the business risk from financial 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 — Beta coefficient reflecting both business and financial risk
Tax Rate — Corporate tax rate as a percentage
Debt — Total debt of the company
Equity — Total equity of the company

Explanation: This formula removes the effects of financial leverage from the levered beta, providing a pure measure of business risk that can be compared across companies with different capital structures.

3. Importance of Unlevered Beta Calculation

Details: Unlevered beta is crucial for capital budgeting decisions, company valuation, risk assessment, and comparing companies with different debt levels. It helps investors understand the inherent business risk separate from financing decisions.

4. Using the Calculator

Tips: Enter levered beta (typically between 0.5-2.0), tax rate as percentage (e.g., 21 for 21%), debt and equity in consistent currency units. All values must be positive, with equity > 0.

5. Frequently Asked Questions (FAQ)

Q1: Why calculate unlevered beta?
A: Unlevered beta allows for comparison of business risk across companies with different capital structures and is used in valuation models like WACC.

Q2: What is a typical unlevered beta range?
A: Most companies have unlevered betas between 0.5-1.5, with defensive industries at the lower end and cyclical industries at the higher end.

Q3: How does tax affect the calculation?
A: The tax shield from debt reduces the risk of leverage, so higher tax rates result in lower unlevered beta calculations from the same levered beta.

Q4: When should market values be used vs book values?
A: For accurate calculations, market values of debt and equity should be used rather than book values, as they reflect current market conditions.

Q5: Can unlevered beta be negative?
A: While theoretically possible, negative unlevered beta is extremely rare and typically indicates assets that move opposite to the market.