Formula to Calculate Levered Beta Value

Levered Beta Formula:

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

Unlevered Beta (β_u):

Tax Rate:

fraction

Debt (D):

Equity (E):

Levered Beta (β_l):

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1. What is Levered Beta?

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

2. How Does the Calculator Work?

The calculator uses the levered beta formula:

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

Where:

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

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

3. Importance of Levered Beta

Details: Levered beta is crucial for calculating a company's cost of equity using the Capital Asset Pricing Model (CAPM). It helps investors assess the risk of a stock compared to the market, especially for companies with significant debt.

4. Using the Calculator

Tips: Enter the 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, and tax rate must be between 0 and 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 only reflects business risk. Levered beta is typically higher than unlevered beta.

Q2: What is a typical range for levered beta?
A: Most companies have betas between 0.5-1.5. Utilities might be below 1.0, while tech stocks often exceed 1.5.

Q3: How does debt affect beta?
A: More debt increases financial risk, which increases levered beta. The tax shield partially offsets this effect.

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

Q5: When should I use levered vs unlevered beta?
A: Use levered beta for equity valuation (CAPM) and unlevered beta for project valuation or comparing companies with different capital structures.