Levered Beta

Posted in Finance, Accounting and Economics Terms, Total Reads: 1109
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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)]

Here:

-          BL = Levered Beta

-          BU = Unlevered Beta

-          T = Tax Rate

-          D/E = Debt to Equity Ratio

 

Example:

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

=  Thus Levered Beta = 1 [ 1 + (1- 0.4)x 1 ] = 1.6

=  BL = 1.6


 

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