Unleveraged Beta

Posted in Finance, Accounting and Economics Terms, Total Reads: 1412
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Definition: Unleveraged Beta

Unleveraged beta is the measure of the risk of the firm with respect to the market which is independent of its financial structure. Unlevering means the firm has no debt that is the bankruptcy cost or cost of financial distress is ignored which reduces the value of unlevered beta.  

Its value is less than 1. The firm related risk is also eliminated and risk remaining is industry specific. Unleveraged beta is used for calculation of beta using the Beta of the firm in the existing industry . Example if the beta  of  Hyundai is given and Beta of another company in the automobile industry   needs to be calculated then beta of Hyundai  needs to be  unlevered  or made independent of its capital structure and then levered according to the capital structure of the  automobile company. The unlevered beta is also known as beta of assets .

 

Formula

Beta ul  = Beta l/ (1+((1-Tax Rate )/Debt/Equity ))

Example

Beta of a leveraged firm is 1.75, Corporate Tax rate = 30% , Debt =70% and Equity =30%

Calculate the unlevered Beta?

Beta ul = Beta l/ (1+(1-.30)/(0.7/0.3))

=1.75 /1+0.3

=1.346


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