1. What is Levered Beta?

Levered beta (β_l) measures the volatility of a company's stock compared to the market, taking into account the company's debt. It shows how much risk the equity of a leveraged company has compared to the market.

2. How Does the Calculator Work?

The calculator uses the levered beta formula:

Where:

• \( \beta_l \) — Levered beta
• \( \beta_u \) — Unlevered beta
• \( tax\_rate \) — Corporate tax rate (as fraction)
• \( D \) — Value of debt ($)
• \( E \) — Value of equity ($)

Explanation: The formula adjusts the unlevered beta for the financial risk introduced by debt, accounting for the tax shield provided by interest payments.

3. Importance of Levered Beta

Details: Levered beta is crucial in the Capital Asset Pricing Model (CAPM) to determine a company's cost of equity. It helps investors understand the risk-return profile of a leveraged company.

4. Using the Calculator

Tips: Enter unlevered beta (typically between 0.5-2.0), tax rate as a fraction (e.g., 0.21 for 21%), debt and equity values in dollars. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between levered and unlevered beta?
A: Unlevered beta shows business risk without debt, while levered beta includes both business and financial risk.

Q2: When should I use levered beta?
A: Use levered beta when calculating cost of equity for a company with debt in its capital structure.

Q3: What's a typical range for levered beta?
A: Most companies have betas between 0.5-1.5, but highly leveraged companies may have betas above 2.0.

Q4: How does debt affect beta?
A: Debt increases equity beta because it amplifies both gains and losses for shareholders.

Q5: Can levered beta be negative?
A: While theoretically possible, negative betas are extremely rare and typically indicate inverse market correlation.