- Valuation Basics
- Enterprise Value
- Enterprise Value Formula
- Equity Value
- Equity Value Formula
- Market Capitalization
- Market Capitalization Formula
- Internal Growth Rate Formula
- Intrinsic Value Formula
- Absolute Valuation Formula
- Assessed Value vs Market Value
- Required Rate of Return Formula
- Historical Cost vs Fair Value
- Large Cap vs Small Cap
- Free Float Market Capitalization
- Market Cap vs Enterprise Value
- Book Value Vs Market Value
- Value vs Growth Stocks
- Book Value Per share
- Fair value vs Market value
- Discounted Cash Flows
- Going Concern concept
- Dividend Discount Model (DDM)
- Gordon Growth Model
- Gordon Growth Model Formula
- Discounted Cash Flow Analysis (DCF)
- DCF Formula (Discounted Cash Flow)
- Free Cash Flow Formula (FCF)
- Free Cash Flow to Firm (FCFF)
- Free Cash Flow to Equity (FCFE)
- Terminal Value
- Terminal Value Formula
- Cost of Equity
- Cost of Equity Formula
- Risk-Free Rate
- Sustainable Growth Rate Formula
- Beta in Finance
- Beta Formula
- CAPM Beta
- Stock Beta
- Calculate Beta Coefficient
- Unlevered Beta
- Market Risk Premium
- Market Risk Premium Formula
- Equity Risk Premium
- Risk Premium formula
- Weighted Average Cost of Capital (WACC)
- Cost of Capital Formula
- WACC Formula
- Security Market Line (SML)
- Systematic Risk vs Unsystematic risk
- Free Cash Flow (FCF)
- Free Cash Flow Yield (FCFY)
- Mistakes in DCF
- Treasury Stock Method
- CAPM Formula
- Cash Flow vs Free Cash Flow
- Business Risk vs Financial risk
- Business Risk
- Financial Risk
- Valuation Multiples
- Equity Value vs Enterprise Value
- Trading Multiples
- Comparable Company Analysis
- Transaction Multiples
- (Price Earning Ratio (P/E)
- PE Ratio formula
- PEG Ratio Formula
- Price to Cash Flow (P/CF)
- Price to Book Value Ratio (P/B)
- Price To Book Value formula
- Price Earning Growth Ratio (PEG)
- Trailing PE vs Forward PE
- Forward PE
- EV to EBITDA Multiple
- EV to EBIT Ratio
- EV to Sales Ratio
- EV to Assets
- Other Valuation Tools
- Valuation Interview Prep
What is Unlevered Beta?
Unlevered Beta is the measurement of the risk of a company without the impact of debt. It is also known as Asset Beta and is used to measure the risk of an unleveraged company to the risk in the market.
- Equity Beta or Levered Beta, however, compares the volatility of a company’s stock against the returns of equity markets over a specific period of time. This is used to measure how sensitive a particular stock is to various macroeconomic factors.
- Since every company has a different capital structure hence it is essential that one compares how risky individual company’s assets are, removing any effect that debt has and only measuring how risky the equity of a company is.
- Increasing debt in a company means that it would require to commit more cash flows to service that debt and hence there is an uncertainty on the future cash flows of a company. This translates to increased risk for a company which is due to increasing leverage rather than a result of market or macroeconomic factor risk. Hence by removing the impact of debt, it can determine the risk of only the company’s assets.
- An unlevered beta will always be lower than the levered beta since it strips off the debt component which adds to the risk. If it is positive, then the investors will invest in this particular stock when the prices are expected to rise and if the unlevered beta is negative then the investors will invest in the stock when the prices are expected to fall.
Unlevered Beta Formula
You can calculate Unlevered Beta using the below formula –
Example of Unlevered Beta Calculation
Let us take an example of a company X which has a beta of 1.5 to the market. The Debt/Equity ratio for the company is 2:3 and the tax rate is 30%.
Hence Unlevered Beta formula = 1.5 / 1 + (1-0.3)0.66
Unlevered Beta = 1.03
Relevance and Use of Unlevered Beta
- Unlevered beta is used when an investor wants to measure the performance of a stock which is publicly traded in relation to market movements without the positive effect of debt taken up the company. A levered beta indicates the sensitivity of a company’s stock price to overall market movements. A positive levered beta indicates that when market performance is good then stock prices will rise and negative levered beta indicates that when market performance is poor then stock prices will fall down.
- An unlevered beta formula measures the performance and volatility of stock without the tax advantages of debt. As the effect of debt is removed, companies with varying capital structure can be compared to measure how risky a particular company’s assets are.
- Investors calculate unlevered beta and use it for comparison by stripping off the impact of debt in the capital structure of the company.
- Also, various equity analysts, use this beta to build various financial models for their investors which provide more information than just a basic scenario.
- Also, another factor to be kept in mind is that if a company has high debt to equity ratio but all debt is rated AAA then it has inherently less risk than a company which has high debt to equity ratio but has debt that is rated below the investment grade.
Unlevered Beta formula is the measurement of the risk of a company with the impact of debt. It measures the risk of the business of the firm which is unleveraged to the risk of the market. It will always be lower than the levered beta since it strips off the debt component which adds to the risk.
If the unlevered beta is positive, then the investors will invest in this particular stock when the prices are expected to rise and if the unlevered beta is negative then the investors will invest in the stock when the prices are expected to fall. It measures the performance and volatility of stock without the tax advantages of debt. As the effect of debt is removed, companies with varying capital structure can be compared to measure how risky a particular company’s assets are.
This has been a guide to what is Unlevered Beta and its definition. Here we discuss unlevered beta formula and how to calculate Unlevered Beta along with an example and its uses. You can learn more about from the following articles –