How to Calculate Levered Beta

Levered beta can be calculated based on the unlevered beta, tax rate, and debt-to-equity ratio.
••• Calculator image by Alhazm Salemi from Fotolia.com

Robert Hamada combined the capital asset pricing model and the Modigliani and Miller capital structure theories to create the Hamada equation. There are two types of risk for a firm: financial and business. The business risk relates to the unlevered beta for the firm; the financial risk refers to the levered beta. An unlevered beta assumes zero debt. The Hamada equation illustrates that when a firm increases its debt, the financial leverage also increases the firm's risk and, in turn, its beta. Levered beta can be calculated based on the unlevered beta, tax rate, and debt-to-equity ratio.

    Gather the following information about the company: unlevered beta; tax rate; and the debt-to-equity ratio (see Resources). The tax rate varies, based on the location and size of the firm. You must estimate the tax rate.

    Multiply the debt-to-equity ratio by 1 minus the tax rate, and add 1 to this amount. For example, with a tax rate of 26.2 percent, a debt-to-equity ratio of 1.54 and a beta of 0.74, the resulting value is 2.13652 (1.54 times (1-.40))+1).

    Multiply the amount in Step 3 by the unlevered beta to get the levered beta. In the example above, the levered beta would be 1.58 (2.13652 times 0.74).

Related Articles

How to Interpret a Beta Coefficient
How to Find the Original Price
How to Calculate Sharpe Ratio
How to Convert From Moles Per Liter to Percentage
How to Calculate Reduction Ratio
How to Calculate Hazard Ratio
How to Calculate Moles from Molecular Weight
What Is Molarity & How Is It Calculated?
How to Find Equations of Tangent Lines
What Is a Quotient & Dividend?
How to Calculate the Rate of Decay
How to Calculate the Height of a Cone From the Volume
How to Write a Rate Law in Chemistry
How to Calculate Isotopes
Characteristics of Aquatic Plants
How to Calculate Millimolars
How to Calculate Rate and Ratio
How to Find the Minimum or Maximum in a Quadratic Equation
How to Calculate Factorials
How to Convert Cost Per Pound Lb to Cost Per Kilo /...

Dont Go!

We Have More Great Sciencing Articles!