Levered Vs Unlevered Beta Calculator

Beta Formulas:

\[ \beta_l = \beta_u \times (1 + (1 - tax\_rate) \times \frac{D}{E}) \] \[ \beta_u = \frac{\beta_l}{1 + (1 - tax\_rate) \times \frac{D}{E}} \]

Beta Value:

Tax Rate:

Total Debt (D):

Total Equity (E):

Calculation Type:

Result:

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1. What is Levered and Unlevered Beta?

Beta measures a stock's volatility relative to the market. Levered beta (β_l) reflects the company's risk including debt, while unlevered beta (β_u) shows the risk of the company's assets without the impact of debt.

2. How Does the Calculator Work?

The calculator uses these formulas:

\[ \beta_l = \beta_u \times (1 + (1 - tax\_rate) \times \frac{D}{E}) \] \[ \beta_u = \frac{\beta_l}{1 + (1 - tax\_rate) \times \frac{D}{E}} \]

Where:

\( \beta_l \) — Levered beta (reflects capital structure)
\( \beta_u \) — Unlevered beta (debt-free risk)
\( tax\_rate \) — Corporate tax rate (as decimal)
\( D \) — Total debt
\( E \) — Total equity

Explanation: The formulas adjust beta for the tax shield provided by debt and the company's capital structure.

3. Importance of Beta Calculation

Details: Understanding levered and unlevered beta is crucial for capital budgeting, valuation, and comparing companies with different capital structures.

4. Using the Calculator

Tips: Enter the known beta value, tax rate (as percentage), total debt and equity amounts, and select whether you're calculating levered or unlevered beta.

5. Frequently Asked Questions (FAQ)

Q1: When should I use levered vs unlevered beta?
A: Use levered beta for equity valuation (CAPM) and unlevered beta for asset valuation or comparing companies with different capital structures.

Q2: What's a typical beta range?
A: Most stocks have betas between 0.5 and 1.5. Utilities often have low betas (~0.5), while tech stocks often have higher betas (~1.2-1.5).

Q3: Why does debt affect beta?
A: Debt increases financial risk, making equity returns more volatile (higher beta). The tax shield partially offsets this effect.

Q4: Can beta be negative?
A: Yes, though rare. Negative beta means the asset moves opposite the market (e.g., some gold stocks).

Q5: How often should beta be recalculated?
A: Recalculate when capital structure changes significantly or when comparing companies in different industries.