Unlevered Beta Calculator

Levered beta measures a company's market risk including its debt obligations. To find the pure asset risk, we unlever the beta using the Hamada equation or standard debt-to-equity adjustments. The primary formulas utilized are: u_beta = l_beta / (1 + (1 - tax_rate) * de), where the debt-to-equity ratio is defined as de = debt / equity. Additionally, the effective tax rate can be derived from net income and pre-tax income using tax_rate = 1 - (ni / pt_income).

Imagine analyzing a manufacturing firm with a levered beta (l_beta) of 1.25. The company carries $40,000,000 in total debt and has an equity value of $60,000,000. Its net income is $8,000,000 against a pre-tax income of $10,000,000. First, find the tax rate: 1 - (8,000,000 / 10,000,000) = 0.20 or 20%. Next, calculate the debt-to-equity ratio (de): $40,000,000 / $60,000,000 = 0.667. Finally, compute the unlevered beta: u_beta = 1.25 / (1 + (1 - 0.20) * 0.667) = 1.25 / (1 + 0.8 * 0.667) = 1.25 / 1.533 = 0.815. This reveals that the company's underlying operational risk is significantly lower than its stock price volatility suggests.

When computing unlevered beta, always ensure your debt and equity figures reflect market values rather than book values for optimal accuracy in valuation models like the WACC. Additionally, verify that your levered beta is calculated over an appropriate historical timeframe—typically two to five years against a relevant market index such as the S&P 500.