Unlevered Beta
It is the beta of a company assuming that the company does not have any debt, that is, the beta of an unlevered company. And Unlevered Beta Calculator is made to help one in such calculations. It is also known as asset beta. Unlevered Beta is a measure of systematic risk of assets only. It helps in making a comparison between companies having different debt-equity ratios.
For calculating unlevered beta, beta of a levered company (it should be publicly listed also) from the same industry can be considered. First, you have to calculate the beta of such a publicly listed levered company which will eventually help calculate the unlevered beta.
Formula
For calculating Unlevered Beta, take the below stated formula into account:
Unlevered Beta = Levered Beta / [1 + {(1 – Tax Rate) (Debt / Equity)}]
About the Calculator / Features
The calculator for unlevered beta helps in making a quick calculation on entering the following figures into it:
- Levered beta
- Tax rate
- Debt – Equity ratio
Calculator
How to Calculate using Calculator
For effortless calculation of unlevered beta, just provide the calculator with the following figures:
Levered Beta
Levered beta, or commonly known as a beta coefficient, is the measure of the relative risk of investment with its market. It can be calculated by dividing covariance between the return on security and market return by the variance of the market return.
You can use our Beta calculator for a quick calculation – Beta Calculator
Tax Rate
Enter the tax rate applicable to the company.
Debt – Equity Ratio
It is the ratio of debt to equity of a company. It can be derived by dividing debt from equity. This ratio is divided to eliminate the effect of debt from the calculation of levered beta.
Example of Unlevered Beta
Suppose Delta Ltd., a company dealing in digital equipment, does not have a debt component in its capital structure. The debt of the company is $550,000. The tax rate to which the company is liable is 35%, and its equity stands at $1,000,000. A company A ltd., dealing in a similar business, has a beta (β) equals to 1.35. The Unlevered Beta of Delta Ltd. is:
| Particulars | Details | Remarks |
| Levered Beta | 1.35 | – |
| Tax Rate | 35% | – |
| Debt – Equity Ratio | 0.55 | 550,000/1,000,000 |
Unlevered Beta = 1.35 / [1 + {(1 – 0.35) (0.55)}] = 0.99
Interpretation
Unlevered beta ignores the debt portion on capital structure and hence, makes a comparison of securities with different debt-equity ratios. It is always less than levered beta as it does not consider debt financing.
Cautions
As stated above, the unlevered beta helps in making a comparison between companies having different debt-equity ratios. But it does not consider the effects of debt financing on the earnings.
