So i'm in the midst of calculating beta for a company and am aware of the concept of unlevering/levering beta to suit a company's current or targeted capital structure. The below link has also been very helpful.
https://www.wallstreetoasis.com/forums/intuitive-…
However, i noticed that the formula does not include another "factor" for perpetuals or preferred shares.
So I assume for a company with perps it'll be:
Typical Formula: Levered Beta = Unlevered Beta (1 + (1-T) D/E)
Formula With Perps ("P"): Levered Beta = Unlevered Beta (1+ (1-T) D/(D+E+P)+P/(D+E+P))?
Thanks guys.
Hey tellmehowtoplay, I'm the WSO Monkey Bot and I'm here since nobody responded to your thread! Bummer...could just be time of day or unlucky (or the question/topci is too vague or too specific). Maybe one of these topics will help:
More suggestions...
I hope those threads give you a bit more insight.
will be great if we can get a discussion! might be useful for other folks too, thanks everyone
Levered Beta = Unlevered Beta * [1 + (1-T) * (D/E + P/E)]
Don't think this is right. Pref dividends aren't tax deductible
I'll dig through my textbooks but I'm sure I saw this haha.
Preferred is a hybrid, so its kind of case by case. As a rule of thumb, treat it like debt but don't tax effect it. But there are certainly circumstances where you want to treat it more like equity.
As an example, check out Garrett motions post reorg capital structure and compare the pref that Honeywell got versus the plan sponsors. Honeywell pref is much closer to debt while the plan sponsor is looking for common upside. Its not a perpetual, but just a good example of needing to check the docs to see how to handle
yeah treat it in whichever way gets you the wacc your MD wants
Thanks, except the preferred debt in this instance is not paying the same interest as the senior debt and like you said it's not tax deductible, hence might it be "inaccurate" to lump it together with the D/E ratio?
Believe the B School person has the formula right. "Treating like Debt" doesn't mean assigning the same rd. We give the pref it's own cost of capital, and say that it's increasing leverage. That sort of intuitively makes sense right? All else being equal, a common equity interest in a company with only common is going to have less volatile returns than in a company with some pref (because they have to get paid out first).
My point is that you can't just turn your brain off completely because your pref is going to behave differently depending on the docs. If it's just straight cash pay, and you're forced to liquidate after a fixed time (e.g. Garrett Motion example i mentioned above), then it's much closer to debt. On the other hand, if it's designed to be converted into common, then you want to reflect that in your fully diluted shares outstanding. The point is that in your upside scenarios, a convertible piece of pref is going to dilute you, while something closer to cash pay is not.
^
so it seems that this is a way of unlevering beta with perps
unlevered beta = Levered beta * (Market Cap / (Debt * (1 - T) + Perps + MC)
haven't seen this before
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