1. What is Levered and Unlevered Beta?

Definition: Beta measures a stock's volatility relative to the market. Levered beta (β_l) includes debt impact, while unlevered beta (β_u) removes financial leverage effects.

Purpose: This calculator converts levered beta to unlevered beta, useful for comparing companies with different capital structures or for valuation purposes.

2. How Does the Calculator Work?

The calculator uses the formula:

Where:

• β_u — Unlevered beta (no debt impact)
• β_l — Levered beta (observed beta with debt)
• Tax Rate — Corporate tax rate (as decimal, e.g., 0.3 for 30%)
• D/E — Debt-to-equity ratio

Explanation: The formula removes the effect of debt by dividing the levered beta by 1 plus the tax-adjusted debt-to-equity ratio.

3. Importance of Unlevered Beta

Details: Unlevered beta allows for apples-to-apples comparison between companies with different capital structures and is essential for WACC calculations in DCF valuations.

4. Using the Calculator

Tips: Enter the observed levered beta, tax rate (default 0.3 for 30%), and debt-to-equity ratio (default 0.5). Tax rate must be between 0 and 1.

5. Frequently Asked Questions (FAQ)

Q1: Why convert levered to unlevered beta?
A: To compare companies with different debt levels or to re-lever the beta for a different capital structure in valuation.

Q2: Where can I find a company's levered beta?
A: Financial websites like Yahoo Finance or Bloomberg provide levered betas for public companies.

Q3: What's a typical debt-to-equity ratio?
A: Varies by industry, but 0.5 is common (meaning 1/3 of capital is debt, 2/3 is equity).

Q4: How do taxes affect beta?
A: Interest is tax-deductible, so the tax rate reduces the effective cost of debt in the formula.

Q5: Can unlevered beta be negative?
A: While theoretically possible, negative unlevered beta is extremely rare in practice.