Unlevered Beta Formula

Unlevered Beta Calculator

Use this beta calculator to convert levered beta to unlevered beta. To see the reverse calculation (unlevered beta to levered beta), check out our Levered Beta Calculator.

If you need additional guidance on the inputs and correct usage of the calculator, see the below sections covering additional details on unlevered beta.

What is Beta?

Beta is a figure that measures a company’s volatility relative to the overall market. In other words, how quickly does this company’s share price move relative to the market (usually represented by the S&P 500).

Beta is most notably used in advanced financial models that use formulas like the Capital Asset Pricing Model (CAPM) to generate discount rates applicable to company cash flows.

Consider checking out our Beta article for a broader overview on the metric and the 3 main methods used to calculate a company's Beta.

Unlevered vs Levered Beta

Unlevered Beta

Unlevered really means “without debt.” So, as you can imagine, unlevered beta represents the beta value of a company before accounting for the impact of debt. This characteristic of unlevered beta makes it great for fairly comparing different companies with different financing structures.

Levered Beta

If unlevered means “without debt”, you can probably guess that levered beta means “with debt.” Levered beta is important because it is notably used in the CAPM formula which is designed to estimate a company’s cost of equity.

Equity investors in a company are paid after debt holders are paid off (interest expense comes before net income). With this in mind, equity investors naturally feel the impact of debt or “leverage” as a company with high levels of debt will leave less cash flow for equity investors. This is why levered beta is used to calculate the cost of equity via the CAPM formula.

Estimating a Company’s Beta

In practice, there are several different ways that a financial analyst could estimate a company’s beta. One method is to find a group of comparable or similar companies. 

So how does this work? The idea here is that you would take the median or average beta value of a group of similar companies and use that value to estimate the beta of your target company.

Although the high level idea seems pretty simple, it actually gets a bit more complicated since each and everyone of those companies in the comparable group will have different financing structures (different amounts of debt, different interest rates, etc).

Steps to Estimate Beta through Comparable Companies:

1. Gather levered betas for the comparable companies. These beta values can be found on sites like Yahoo Finance, MarketWatch, Bloomberg, etc.
2. Convert levered betas into unlevered betas. See conversion formula in sections below.
3. Find median or average unlevered beta. Feel free to remove outliers values.
4. Covert unlevered beta into levered beta. This is where you would “relever” the beta using the financing structure of your target company.

Formula Inputs:

• B_U = Unlevered Beta
• B_L = Levered Beta
• T = Tax Rate (typically 21% in Corporate America)
• Debt = Total Debt. Found in the liabilities section of a company’s balance sheet
• Equity = Total Equity. Typically represented by a company’s market capitalization (Can find on Google, Yahoo Finance, Bloomberg, etc)

Levered Beta to Unlevered Beta

Unlevered Beta to Levered Beta

Additional Resources

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Other Articles You May Find Helpful

• How to Calculate Beta [With Examples]
• Cost of Equity Formula
• WACC Calculator
• Balance Sheet vs Income Statement
• How to Become an Investment Banker