Levered Beta Formula

Levered Beta Calculator

Use this calculator to convert unlevered beta to levered beta. To see the reverse calculation (levered beta to unlevered beta), check out our article on the unlevered beta formula.

If you are unsure of how to use the above calculator, see the sections below for more guidance on formula usage and calculation steps!

What is Levered Beta?

Beta

Beta measures the price sensitivity of a security (usually a stock) relative to the security’s broader market (usually the stock market - S&P 500). In this case, price sensitivity, sometimes referred to as “volatility”, refers to the security returns (change in prices of the stock) relative to the market returns (change in prices of the overall stock market). 

Levered Beta

Levered beta is a specific form of beta that accounts for the impacts of a company’s debt or “leverage.” This is important to understand because there are different situations as to when you would want to use levered beta and when you might want to use unlevered beta.

Levered beta is often used by financial analysts to calculate the cost of equity of a stock through the Capital Asset Pricing Model (CAPM). This is important because you’ll want to include the impacts of debt when trying to find the equity value of a company.

Unlevered Beta

Sometimes, you’ll find that you won’t want to include the impacts of debt in a company beta. This can be the case when you are looking to compare the beta values of multiple companies. Since different companies have different debt structures (different amounts and proportions of debt funding) it would be difficult to make a direct comparison of those companies' levered betas. This is where unlevered beta comes in handy, as it allows you to compare company betas by excluding the impact of each company's debt structures.

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Converting Between Levered and Unlevered Beta

Use the formulas below to convert between levered and unlevered beta. We also welcome you to use our free built-in calculator at the top of this article!

Formula Inputs:

• B_U = Unlevered Beta
• B_L = Levered Beta
• T = Corporate Tax Rate (Typically 21% in America)
• Debt = Total Debt (Found on the company balance sheet)
• Equity = Total Equity (Company market capitalization)

Levered Beta to Unlevered Beta

Use this formula to convert levered beta into unlevered beta.

Unlevered Beta to Levered Beta

Use this formula to convert unlevered beta into levered beta.

Example: Calculating Levered Beta (Comparable Companies)

Financial analysts can calculate the levered beta of a stock by finding the median or average beta from a group of similar or “comparable” companies. In theory, the idea is pretty simple in that you are finding beta by using the betas of similar companies. However, you do have to be careful to make sure you use levered and unlevered betas correctly at different points of the comparison process.

The below example will walk you through the 4 steps you need to complete to find the levered beta of a company (Ex. McDonald’s).

Step 1: Identify Comparable Companies

Select a group of companies that are similar to your target valuation company based on industry, company size, geographic location, business model, etc. In this McDonald’s example, we’ve identified these four comparable companies:

• RBI (Own’s Burger King)
• Wendy’s
• Yum Brands (Own’s Taco Bell)
• Chipotle

Step 2: Collect Financial Data 

Gather the unlevered betas for your set of comparable companies. 

Most online financial databases (Ex. Yahoo Finance, MarketWatch, and Bloomberg) will provide you with the levered betas, equity values (market capitalization), and total debt (balance sheet) for each company. In this case, we used the simplified American corporate tax rate of 21% for each company.

Once you gather all the financial information, you can convert each of the levered betas to unlevered betas using the unlevered beta formula or unlevered beta calculator.

Step 3: Find the Median or Average Beta of the Group

Financial analysts will often remove outliers in the group and will usually prefer to use the group median as a simple average could be skewed from outlier points. Some may even consider calculating the 25th and 75th percentiles of the group.

Step 4: Convert the Median Unlevered Beta to Levered Beta

This is where you would convert the unlevered beta back to levered beta by using McDonald’s specific capital structure (equity value, total debt, and tax rate). This is done to account for the impact of company debt so that you can use this figure in the CAPM formula to solve for the cost of equity.

You are welcome to use the levered beta formula or levered beta calculator provided in this article!

Calculating Levered Beta (Technical Stock Market Analysis)

You can also use technical stock market analysis to calculate levered beta by using the covariance of the stock and market returns and the variance of the stock market returns. See method 3 in our how to calculate beta article! 

Additional Resources

If you found this article helpful, consider checking out our Complete Finance & Valuation Course where we teach students the core valuation models with built-from-scratch case studies. Use this course

Other Articles You Might Find Helpful

• How to Calculate Beta
• Unlevered Beta Formula
• WACC Calculator
• Cost of Equity Formula
• Precedent Transactions Analysis