Unlevered Beta Calculation

Unlevered Beta Formula:

\[ \beta_U = \frac{\beta_L}{1 + (1 - \text{Tax Rate}) \times \frac{\text{Debt}}{\text{Equity}}} \]

Levered Beta (β_L):

Tax Rate:

decimal

Debt:

currency

Equity:

currency

Unlevered Beta (β_U):

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1. What is Unlevered Beta?

Unlevered Beta (β_U) measures the volatility of returns of a company without the impact of debt. It represents the business risk of a firm isolated from its financial risk, making it useful for comparing companies with different capital structures.

2. How Does the Calculator Work?

The calculator uses the Unlevered Beta formula:

\[ \beta_U = \frac{\beta_L}{1 + (1 - \text{Tax Rate}) \times \frac{\text{Debt}}{\text{Equity}}} \]

Where:

\( \beta_U \) — Unlevered Beta
\( \beta_L \) — Levered Beta
\( \text{Tax Rate} \) — Corporate tax rate (as decimal)
\( \text{Debt} \) — Total debt (in currency)
\( \text{Equity} \) — Total equity (in currency)

Explanation: The formula removes the effect of financial leverage from the levered beta, providing a pure measure of business risk that can be compared across companies with different debt levels.

3. Importance of Unlevered Beta

Details: Unlevered beta is crucial for capital budgeting, valuation analysis, and comparing investment opportunities across companies with different capital structures. It helps investors understand the inherent business risk without the distortion caused by debt financing.

4. Using the Calculator

Tips: Enter levered beta (positive number), tax rate (0-1 decimal), debt and equity amounts (positive numbers). All values must be valid for accurate calculation.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between levered and unlevered beta?
A: Levered beta includes both business risk and financial risk (from debt), while unlevered beta measures only business risk.

Q2: When should I use unlevered beta?
A: Use unlevered beta when comparing companies with different capital structures, valuing acquisitions, or analyzing projects with different financing arrangements.

Q3: What is a typical range for unlevered beta values?
A: Most companies have unlevered betas between 0.5 and 1.5, with 1.0 representing average market risk.

Q4: How does tax rate affect unlevered beta?
A: Higher tax rates reduce the impact of debt on beta, resulting in a smaller difference between levered and unlevered beta.

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.