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 sensitive the stock is to market movements when the company's capital structure includes debt.

2. How Does the Calculator Work?

The calculator uses the levered beta formula:

Where:

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

Explanation: The formula adjusts the unlevered beta to reflect the financial risk introduced by debt in the company's capital structure.

3. Importance of Levered Beta

Details: Levered beta is crucial for calculating the cost of equity using CAPM, which is then used in WACC calculations for valuation and capital budgeting decisions.

4. Using the Calculator

Tips: Enter 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.

5. Frequently Asked Questions (FAQ)

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

Q2: What is a typical range for levered beta?
A: Most companies have betas between 0.5-1.5, though highly leveraged companies may have betas above 2.0.

Q3: Why do we adjust for taxes in the formula?
A: Because interest payments are tax-deductible, reducing the effective cost of debt.

Q4: Can levered beta be less than unlevered beta?
A: No, levered beta is always equal to or greater than unlevered beta since debt adds risk.

Q5: How often should I recalculate levered beta?
A: Whenever the company's capital structure changes significantly, or at least annually for valuation purposes.