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Definition: Levered Beta
Beta: It is a number which indicates volatility (fluctuations in price) of a stock, in relation to volatility of the market or a benchmark. It generally compares risk of a stock with regard to risk of the market.
Unlevered Beta: A Company’s unlevered beta is the beta without any debt
Levered Beta: It is the beta of a company that includes debt. IT basically describes capital structure of a company (composition of debt and equity).
BL = BU [1 + (1 – T) x (D/E)]
- BL = Levered Beta
- BU = Unlevered Beta
- T = Tax Rate
- D/E = Debt to Equity Ratio
A company with no debt in its capital structure initially had beta 1. Later on, the firm decides to restructure its capital and doubles its assets by taking debt. Corporate Tax rate prevalent is 40%. Calculate the levered beta for the firm.
= Given: Unlevered beta = 1, D=E=x , so D/E=1, T = 0.4