Unlevered Beta


N's spirit Basic MBA > Unlevered Beta

Unlevered Beta

Unlevered Beta calculated by eliminating financial risk from corporate risk, which means showing only business risk of a company.

In case of acquiring unlisted company which Beta is unknown, the company trying to acquire needs to clarify Beta of this unlisted company. Then, Beta of unlisted company is calculated by Beta of listed company. However, Beta of listed company includes financial risk, but the company needs only business risk separated from financial risk because financial risk has nothing to do with business risk.

In such case, unlevered Beta is calculated.

Unlevered Beta

Relationship between Beta and unlevered Beta is as follows.



Beta L: levered Beta (Normal Beta)
Beta U: Unlevered Beta
D: Debt (Net)
E: Equity (Net)
T: Effective tax rate


An example of calculation of unlevered Beta

Now, we think unlisted company, Company F.

Calculation unlevered Beta of listed company having similar business to Company F.

L D/E Tax U
Company Z 1.40 45% 40.7% 1.11
Company N 1.35 35% 41.0% 1.12
Company P 1.28 10% 41.3% 1.21

Average of Beta U is 1.14 so it is decided that Beta U of Company F is 1.14.

In case of calculating Beta, D/E ratio should be clarified. However, there is no way to know net equity of Company F because it is unlisted. (Originally, we want to know it)

Then, D/E ratio can refer to that of listed company, in this case average D/E ratio of three companies, 30% can be used.

Unlevered Beta


(In case that tax rate is 41.5%)


Other examples of calculation of unlevered Beta

In case that business risk significantly change because the company starts new business

In this case, the company first needs to clarify Beta U of new business and existing businesses. Once they are clarified, weighted average can be calculated based on amount of asset for each business. Finally, Beta can be calculated based on new D/E ratio of the company after entering new business.

Unlevered Beta

In case of estimating risk of business unit of one company

When one same company has many business units, it should be wrong that Beta of whole company is used for risk estimation of each business unit. Then, Beta of each business unit should be estimated based on similar business of competitors.

Unlevered Beta


How to derive formula of unlevered Beta

First of all, asset should be divided into net asset value and tax shield.

Unlevered Beta



Beta D can be regarded as 0 because it has almost nothing to do with market risk.




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Finance
Principle of Finance
FCF (Free Cash Flow)
DCF (Discount Cash Flow)
WACC
Beta
Unlevered Beta
IRR
Terminal Value
Disadvantages of WACC
APV (Adjusted present value) Method
Making Portfolio and Diversification of Risk 1
Making Portfolio and Diversification of Risk 2
Return analysis by DCF 1
Return analysis by DCF 2
Important Indicator of DCF
Optimized Debt Equity Ratio
Tax Shield by Debt
Types of Debt
Policy of Dividend
Relationship between Policy of Dividend & Stock Price
Relationship between Own Shares Purchase & Stock Price
Investment to raise Stock Price
Bond
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Comparison of Yield Rate among Several Bonds
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Process of Purchasing Stock Price in M&A
Types of Selling Business
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Tracking Stock
Curve Out
LBO (Leveraged Buy Out)
MBO (Management Buy Out)
PPA (Purchase Price Allocation)
PMI (Post Merger Integration)


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N's spirit Basic MBA > Unlevered Beta

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