1. What is the Levered Beta Function?

The levered beta (β_l) measures the volatility of a company's stock compared to the market, taking into account its debt. It shows how the company's equity risk changes with its capital structure.

2. How Does the Calculator Work?

The calculator uses the levered beta formula:

Where:

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

Explanation: The formula shows how financial leverage affects a company's equity beta. The tax shield from debt reduces the risk-increasing effect of leverage.

3. Importance of Levered Beta Calculation

Details: Levered beta is crucial for calculating cost of equity using CAPM, which is essential for company valuation, investment decisions, and capital budgeting.

4. Using the Calculator

Tips: Enter unlevered beta (typically industry average), tax rate as decimal (e.g., 0.21 for 21%), debt and equity in dollars. All values must be positive with tax rate between 0-1.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between levered and unlevered beta?
A: Levered beta includes financial risk from debt, while unlevered beta reflects only business risk. Unlevered beta is also called asset beta.

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

Q3: What are typical beta values?
A: Most stocks have betas between 0.5-1.5. Utilities often have low betas (~0.5), while tech stocks often have higher betas (~1.2-1.5).

Q4: How does debt affect beta?
A: More debt increases equity beta because debt payments are fixed obligations, making equity returns more volatile.

Q5: Can beta be negative?
A: Yes, though rare. Negative beta means the stock moves opposite to the market (e.g., some gold mining stocks).