Levered Beta

Levered Beta (also called Equity Beta) measures a company’s systematic risk including the effects of its Capital Structure. It reflects both the business risk (from operations) and the additional financial risk from leverage.

Formula

Re-levering:

$${\beta }_L={\beta }_U\left[1+\left(1-t\right)\frac{D}{E}\right]$$

Where:

• ${\beta }_L$ = Levered Beta
• ${\beta }_U$ = Unlevered Beta
• $t$ = Corporate Tax Rate
• $D$ = Market Value of Debt
• $E$ = Market Value of Equity

Unlever:

$${\beta }_U=\frac{{\beta }_L}{1+\left(1-t\right)\frac{D}{E}}$$

Where:

• ${\beta }_U$ = Unlevered Beta
• ${\beta }_L$ = Levered Beta
• $t$ = Corporate Tax Rate
• $D$ = Market Value of Debt
• $E$ = Market Value of Equity

Interpretation

• Higher leverage (more debt) → Higher Levered Beta → Higher risk for equity holders
• Unlevered Beta isolates business risk, useful for comparing companies with different capital structures