# Contents

INTRODUCTION: ...................................................................................................................................... 2 HOW TO CALCULATE LEVERED BETA: ....................................................................................................... 2 STEPS T O CALCULATE: ............................................................................................................................. 3 HOW TO CALCULATE UNLEVERED BETA: .................................................................................................. 3 STEPS TO CALCULATE:.............................................................................................................................. 3 BETA CONCEPT: ....................................................................................................................................... 4 LEVERED COMPANY: ................................................................................................................................ 4 UNLEVERED COMPANY: ........................................................................................................................... 7 BETAS OF LEVERED AND UNLEVERED BY SECTOR: .................................................................................... 7 CONCLUSION: ........................................................................................................................................ 12

Levered beta can be calculated based on the unlevered beta. D/E is the company's debt/equity ratio. Unlevering a beta removes the financial effects from leverage. The unlevered beta is the beta of a company without any debt. companies that do not have debts on their balance sheets tend to survive better in a recession. HOW TO CALCULATE LEVERED BETA: Robert Hamada combined the capital asset pricing model and the Modigliani and Miller capital structure theories to create the Hamada equation. though the exact percentage will vary depending on the industry and management's preferences. . the financial risk refers to the levered beta. and debt-to-equity ratio. Tc is the corporate tax rate. . The Hamada equation illustrates that when a firm increases its debt. However. . Levered Beta: Levered beta is the beta that reflects a capital structure that does include debt. The business risk relates to the unlevered beta for the firm. its beta. There are two types of risk for a firm ± financial and business. The formula to calculate a company's unlevered beta is: Where: BL is the firm's beta with leverage. the financial leverage also increases the firm's risk and. tax rate. in turn. The term often refers to firms that have a large percentage of debt relative to equity when compared against peers in the same industry. An unlevered beta assumes zero debt. Many financiers believe that the optimum capital structure requires some level of borrowing.INTRODUCTION: Unlevered Beta: A type of metric that compares the risk of an unlevered company to the risk of the market.

y Compute the company's debt-to-equity ratio by dividing total debt by stockholders' equity on the company's balance sheet. and it is widely used by investors and corporate managers. Gather the following information about the company .STEPS T O CALCULATE: 1. and add 1 to this amount. An unlevered beta compares the movement in the shares of a company without debt to the movement of the market.54 times (1-.74. a positive beta means that the company's shares move in the same direction as the market. you should use the company's average tax rate over the past three years. 2. In the example above. You must estimate the tax rate. HOW TO CALCULATE UNLEVERED BETA: A company's beta is a numerical measure of how closely correlated a company's shares are to the stock market as a whole. STEPS TO CALCULATE: y y Get the company's levered beta. unlevered beta is a popular measure of systemic risk.40))+1).13652 times 0.2 percent. with a tax rate of 26. Multiply the amount in Step 3 by the unlevered beta to get the levered beta. an unlevered beta measures the riskiness of the company's underlying operations.13652 (1. based on the location and size of the firm. To be conservative. .54 and a beta of 0. Determine the company's corporate tax rate by dividing the company's tax expense by its pre-tax income on the income statement. and a negative beta means that the company's shares are inversely correlated to the market. y Calculate the company's unlevered beta according to the following formula: Bl / [1+ (1-Tc) x (D/E)]. For example. the levered beta would be 1.58 (2.Unlevered beta. a debt-to-equity ratio of 1. A beta of zero means there is no correlation between the company's stock and the market. Multiply the debt-to-equity ratio by 1 minus the tax rate. 3. By removing the effects of debt. The tax rate varies. the resulting value is 2.74). For this reason. tax rate and the debt-to-equity ratio.

Tc is the average corporate tax rate that you computed in Step 2. the beta of a stock or portfolio is a number describing the relation of its returns with that of the financial market as a whole. Common ways to attain leverage are borrowing money. because of the correlation of its returns with the returns of the other assets that are in the portfolio.2. In finance. buying fixed assets and using derivatives. its systematic risk. S&P 500 & so on. Some analysts. an average corporate tax rate of 35 percent and total debt of \$100 and stockholders' equity of \$200. but others take on so much debt they have difficulty servicing it and may file for bankruptcy. dispute the idea that leverage affects a company's performance in any way. suppose that a company has a levered beta of 1. in Step 1.6. The beta coefficient is a key parameter in the capital asset pricing model (CAPM). and D/E is the debt-to-equity ratio you calculated in Step 3. LEVERED COMPANY: A levered company is a company that uses any debt to help finance its operations.In this formula. Bl is the levered beta. Beta is also referred to as financial elasticity or correlated relative volatility. leverage is a general term for any technique to multiply gains and losses. Highly leveraged companies often have more volatile profits than other companies. It measures the part of the asset's statistical variance that cannot be mitigated by the diversification provided by the portfolio of many risky assets. As an example. or market risk. however.6 / [1+ (1-0. Important examples are: . It is non-diversifiable risk. and can be referred to as a measure of the sensitivity of the asset's returns to market returns. The company's unlevered beta would be 1.s BETA CONCEPT: In finance.35) x (100/200)] = 1. Measuring beta can give clues to volatility and liquidity in the market place. Most companies are leveraged to some degree. Beta can be estimated for individual companies using regression analysis against a stock market index such as.

buying fixed assets and using derivatives. Unlevered equity is equity financing for an all-equity firm. This volatility is offset. The more it borrows the less equity capital it needs. Leveraged companies often have more volatile earnings than firms that rely solely on equity financing. costs. If you thought that Intel should be more levered. the assets and operations may suffer from outside influences such as a takeover. With a highly leveraged company. Important examples are:  A public corporation may leverage its equity by borrowing money. issued by the government. . meaning that a change in revenue will result in a larger change in operating income. leverage is a general term for any technique to multiply gains and losses. so any profits or losses are shared among a smaller base and are proportionately larger as a result. In finance. A highly leveraged company has most of its capitalization from long and short term debt. Common ways to attain leverage are borrowing money. The more it borrows the less equity capital it needs. as opposed to variable.  Hedge funds often leverage their assets by using derivatives. or greenmail. You will have used leverage to create a riskier portfolio than owning Intel alone.  A business entity can leverage its revenue by buying fixed assets. A public corporation may leverage its equity by borrowing money. To shield against this the long term debt may be traded for tax-differed or exempt bonds. not in share underwriting. by the possibility of a higher return to stockholders if the firm is able to earn more on its assets than the cost of the money used to finance those assets. however. Levered equity means equity in a company that also uses debt financing. so any profits or losses are shared among a smaller base and are proportionately larger as a result. you could buy shares in Intel partially using your own cash and borrow the amount of money representing the amount of leverage you believe Intel should have for the percentage of the company that you own to buy additional shares in Intel. A company that uses borrowed money to help finance its assets. This will increase the proportion of fixed. this is often done in specific industries to promote growth in those areas.

A firm with significantly more debt than equity is considered to be highly leveraged. y The amount of debt used to finance a firm's assets. meaning that a change in revenue will result in a larger change in operating income. issued by the government. Levered equity means equity in a company that also uses debt financing. or greenmail. this is often done in specific industries to promote growth in those areas. to increase the potential return of an investment. Leveraged companies often have more volatile earnings than firms that rely solely on equity financing. the assets and operations may suffer from outside influences such as a takeover. y The use of various financial instruments or borrowed capital. A business entity can leverage its revenue by buying fixed assets. however. A company that uses borrowed money to help finance its assets. This will increase the proportion of fixed. as opposed to variable. you could buy shares in Intel partially using your own cash and borrow the amount of money representing the amount of leverage you believe Intel should have for the percentage of the company that you own to buy additional shares in Intel. not in share underwriting.  Hedge funds often leverage their assets by using derivatives. y Leverage is most commonly used in real estate transactions through the use of mortgages to purchase a home. EG : Enron & Satyam . such as margin. costs. With a highly leveraged company. To shield against this the long term debt may be traded for tax-differed or exempt bonds. If you thought that Intel should be more levered. You will have used leverage to create a riskier portfolio than owning Intel alone. by the possibility of a higher return to stockholders if the firm is able to earn more on its assets than the cost of the money used to finance those assets. This volatility is offset. A highly leveraged company has most of its capitalization from long and short term debt. Unlevered equity is equity financing for an all-equity firm.

37 1.29% 48.60 0.17% 15.80 1. Number of Firms 35 67 46 65 25 60 499 7 5 38 22 17 90 49 21 Average Beta 1.50% 4.80 0.64 0.74 1.04% 12.72% 53.36 0.97% 42.UNLEVERED COMPANY: An unlevered company is a company which has no debt.77 1.75 Market D/E Ratio 21.01% 27.06 0.27 0.61% 20.95% 18.45 0.50 0. levered and unlevered for US COMPANIES. Please refer to the section: ³Variable Definition´ for further explanations.99% 25.34% 189.25 0.23 0. EG: Infosys BETAS OF LEVERED AND UNLEVERED BY SECTOR: The table shows industry average betas.15 Industry Name Advertising Aerospace/Defense Air Transport Apparel Auto & Truck Auto Parts Bank Bank (Canadian) Bank (Foreign) Bank (Midwest) Beverage (Alcoholic) Beverage (Soft Drink) Biotechnology Building Materials Cable TV .58 0.30 0.53% 22.59% 30.08 1.53 0.41 1.74% 7.76 1.71 1.34% Unlevered Beta 1.34 0.97 0.71 0.67 0.61 1.03 0.44 0.

Drug E-Commerce Educational Services Electric Util.93% 16.76 0.62 0.51% 54.26% 23.73 0.67% 7.06% 26.60% 5.17 1.85% 23.70 0.91 0.86% 82.58 0.46 0.27 1.30 3.78 0.08 0.69 0.29% 91.40% 8.45 1. (Div.41% 22.89 1.66% 18.92% 6.32% 17.92 0.45 0.66 389 143 117 305 52 38 25 31 16 93 179 88 31 85 233 104 20 1.Canadian Energy Cement & Aggregates Chemical (Basic) Chemical (Diversified) Chemical (Specialty) Coal Computer Software/Svcs Computers/Peripherals Diversified Co.03% 20.56 0.23% 64.53 0.21 2.79 0.75 1.19% 16.87 0.62 1.06% 1.78 0.55% 2.46 0.63 3.) Food Processing Food Wholesalers 11 13 16 31 92 11 0.40 1.24% 81.89 1.50 0.54 .06 0.40 1.50 0.10 0.85 1. (Central) Electric Utility (East) Electric Utility (West) Electrical Equipment Electronics Entertainment Entertainment Tech Environmental Financial Svcs.66 0.72 0.90 2.78 0.76 17.79 1.63% 0.79 0.07 1.85% 57.69 0.46% 29.

Housing/RV Maritime Medical Services Medical Supplies Metal Fabricating 12 21 38 23 32 16 34 77 30 28 200 33 43 78 297 21 17 133 19 28 195 262 38 1.71 0.95% 2.87% 58.94 0.50 1.92% 3.65 2.87% 18.76 0.72 0.85 0.08 0.60% 0.74 .09% 46.67% 61.) Internet Investment Co.14 0.10% 0.57 0.82 0.00 0.77 1.08% 16.13% 13.07 0.81 0.64 1.67 2.76 0.80 18.33% 8. Furn/Home Furnishings Grocery Healthcare Information Home Appliance Homebuilding Hotel/Gaming Household Products Human Resources Industrial Services Information Services Insurance (Life) Insurance (Prop/Cas.74 1.55 0.74 0.70 0.44 0.90% 23.(Foreign) Machinery Manuf. Investment Co.03% 43.06 0.Foreign Electronics Foreign Telecom.67 0.05% 14.75 0.12 1.50% 8.87 0.86% 15.37% 19.78 1.77% 7.23% 28.60 0.65 0.93% 12.54 0.88 0.74 0.82 0.08 0.00% 36.94 0.64 0.99 1.85 0.67 1.18% 5.51 0.85 0.62% 21.63 0.

81 0.75% 83.62 0.E.01% 19.09% 4.77 0.86 0.85 0.87 0.56 0.32% 31.32 18.58 0.52 0. Railroad Recreation Restaurant Retail (Special Lines) Retail Building Supply Retail Store Securities Brokerage Semiconductor 76 30 38 20 28 93 35 39 34 145 14 24 61 104 43 135 18 78 84 175 14 9 49 26 0.69 1.97% 15.86 0.) Natural Gas (Distrib.36% 7.38% 7.78 1.88 0.98 0.65 0.) Newspaper Office Equip/Supplies Oilfield Svcs/Equip.97% 3.11 0.19% 42.38 1.94 0.93 0.86% 0.41 1.) Natural Gas (Div.84 0.99 0.84 0.92% 16.90 0.98% 36.12% 20.74 0.97 1.I.76% 16.81% 14.40 0.01 0.84 0. Packaging & Container Paper/Forest Products Petroleum (Integrated) Petroleum (Producing) Pharmacy Services Power Precious Metals Precision Instrument Publishing R.80% 10.74 0.54 0.39% 76.95 0.53 0.53 0.61 0.41% 8.Metals & Mining (Div.63% 18.64 0.63 0.T.55 0.74% 20.80 0.73 0.85% 65.59% 44.77 0.74 1.80 .61 0.85 0.67 0.42 0.59% 54.24% 63.

50 2.40% 27.96 0.20 1.43 1.85 0.32 0.50 0.59 0.48% 59.45 0.06 0.60 2.84% 22.64 2.13% 12.32% 4.38 1.61% 10.90% 27.78 0.94 1.18% 8.98 1. Equipment Telecom. Services Thrift Tire & Rubber Tobacco Toiletries/Cosmetics Trucking Utility (Foreign) Water Utility Wireless Networking Grand Total 124 16 24 14 120 137 222 14 13 23 36 6 17 66 7091 2.93% 2.05% 3.72 0.33 0.81 .58 0.51 0.63 0.02 0.25% 25.64 0.Semiconductor Equip Shoe Steel (General) Steel (Integrated) Telecom.92% 26.01% 33.26 1.66 0.47% 57.00 6.03 2.48 1.51% 75.26 2.

If beta = 1 it states that the companies share goes hand in hand with the market share. Levered company is a company which has financial debt and unlevered company is a company in which unloading of financial debt takes place. . Beta is used as a measure to rate the companies in Bombay Stock Exchange (BSE) & National Stock Exchange (NSE). For an individual when he wants to investment in any company.CONCLUSION: Beta helps us to measure the volatility of the company¶s market share. Beta helps him to take the right decision.