Question on levered beta calculation
Hi All--currently interview prepping, and have a quick question + would like confirmation I understand this correctly.
When calculating the cost of equity for WACC in a DCF, my understanding is that you should take the average levered beta of comparable firms, then re-lever based on the capital structure of the firm you are valuing. The formula to find unleveraged beta is below:
Unleveraged Beta = Avg. Leveraged Beta of Comps / (1+(1-Tax Rate)*(Debt/Equity Ratio))
Is the above debt/equity ratio calculated as the average debt/equity ratio for your comp set?
Once calculated, you re-lever using the following formula:
Leveraged Beta = Unleveraged Beta of Comps / (1+(1-Tax Rate)*(Desired Debt/Equity Ratio))
The resulting beta is what you use in the CAPM formula to get cost of equity. Is my description all correct?
Correction--I meant to say that the re-levering formula is Leveraged Beta = Unleveraged Beta of Comps * (1+(1-Tax Rate)*(Desired Debt/Equity Ratio))
It should be multiplied, not divided.
Close. Unlevered beta is the beta of the company’s operating assets, without the effect of leverage. Therefore, you want to take the average of the unlevered beta of the comp set (thereby getting a proxy for operating asset risk) then re-lever that beta at PF Capital structure (thereby getting a risk for the business that incorporates capital structure).
Gotcha. If you were looking at a comp set and calculating the beta in excel (covariance/variance formulas), that will give you the levered beta, correct? Therefore, wouldn't you have to take the average levered beta, unlever that average, then re-lever for your company?
normally you take the unlevered beta at average directly and re-lever
How do you calculate unlevered beta directly? I have only ever seen formulas where unlevered beta calculated based on levered beta.
Sed deleniti porro officia ab optio. Suscipit itaque molestiae iusto sed amet unde. Et id minus ad nobis deserunt ut ut. Nemo eum cumque eum ut deserunt nulla. Dolores rerum explicabo minus ea ea saepe impedit. Alias earum ullam impedit facere quam. Sunt eum iste sed voluptatem perspiciatis dolores.
Dolores quos veniam fugiat doloremque distinctio. Exercitationem soluta est laboriosam voluptas odio nisi suscipit. Quisquam repellat sed necessitatibus veritatis recusandae. Ea minima facere distinctio rem aut.
Hic consectetur sequi quo illum sed quas incidunt. Veniam nulla corrupti iusto. Delectus fugit consequatur veniam. Est rem sapiente sit beatae ipsa mollitia. Aut magnam recusandae debitis doloremque voluptatibus.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...