1. What is Unlevered Beta?

Unlevered beta (β_u) measures the market risk of a company without the impact of debt. It shows the volatility of returns for a business, excluding financial leverage, making it useful for comparing companies with different capital structures.

2. How Does the Calculator Work?

The calculator uses the unlevered beta formula:

Where:

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

Explanation: The formula removes the effect of financial leverage from the observed (levered) beta to find the business's inherent risk.

3. Importance of Unlevered Beta

Details: Unlevered beta is crucial for capital budgeting, valuation, and comparing companies with different capital structures. It represents pure business risk without financial risk.

4. Using the Calculator

Tips: Enter levered beta (typically from comparable companies), tax rate as a fraction (e.g., 0.21 for 21%), debt and equity in dollars. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: Why calculate unlevered beta?
A: It allows comparison of companies' business risks independent of their financing decisions, useful for valuation and capital structure analysis.

Q2: What's a typical unlevered beta range?
A: Most companies fall between 0.5-1.5. Utilities might be lower (0.3-0.6), while tech firms might be higher (1.2-2.0).

Q3: When should I use unlevered beta?
A: When valuing a company, assessing acquisition targets, or comparing companies with different debt levels.

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 betas.

Q5: Can unlevered beta be negative?
A: Extremely rare in practice. Negative beta would imply returns move opposite to the market, which is unusual for most businesses.