Unlevered Beta Calculator
Print| Debt to Equity Ratio (D/E) | 0.00x |
When comparing the business risk of competing firms across an industry, published stock market Betas (equity Betas) are deceptive because they combine two separate risks: operational business risk and financial debt leverage risk. To isolate pure business operating risk independent of capital structure debt choices, valuation analysts calculate Unlevered Beta (also known as Asset Beta).
Our free Unlevered Beta Calculator uses Hamada’s Equation to remove the financial risk multiplier of corporate debt from equity Betas and re-lever Beta for target capital structures.
How to Calculate Unlevered Beta (Asset Beta)
Hamada’s equation strips away the interest tax shield and financial leverage ratio from a company’s reported equity Beta.
Unlevered Beta (Asset Beta) Formula:
βᵤ = βₗ / [ 1 + ( (1 - T_c) × ( D / E ) ) ]
Re-Levered Beta Formula (Target Capital Structure):
βₗ = βᵤ × [ 1 + ( (1 - T_c) × ( D_target / E_target ) ) ]
- βᵤ: Unlevered Beta (pure operational business risk).
- βₗ: Reported Levered Equity Beta (market systematic risk).
- T_c: Corporate income tax rate (in decimal format).
- D / E: Market Debt-to-Equity ratio.
Step-by-Step Hamada Equation Example
Suppose an equity analyst is evaluating a company with a reported Levered Equity Beta (βₗ) of 1.40. The firm’s balance sheet maintains a Debt-to-Equity ratio (D/E) of 0.80 (80% debt relative to equity) and faces a 25.0% corporate tax rate (T_c).
Let’s calculate the firm’s pure Unlevered Asset Beta (βᵤ):
Tax Shield Adjustment (1 - T_c) = 1 - 0.25 = 0.75
Leverage Factor = 0.75 × 0.80 = 0.60
Denominator = 1 + 0.60 = 1.60
Unlevered Beta (βᵤ) = 1.40 / 1.60 = 0.875
| Beta Metric Stage | Debt-to-Equity Ratio | Calculated Beta Value | Risk Component Isolated |
|---|---|---|---|
| Reported Levered Equity Beta (βₗ) | 0.80 D/E Ratio | 1.40 Beta | Total risk (Business Risk + Financial Debt Risk) |
| Unlevered Asset Beta (βᵤ) | 0.00 (Zero Debt) | 0.875 Beta | Pure operating business risk only |
| Re-Levered Target Beta (βₗ-target) | 0.40 Target D/E Ratio | 1.138 Beta | Adjusted for acquirer’s target capital structure |
Frequently Asked Questions (FAQ)
What is the difference between Levered Beta and Unlevered Beta?
Levered Beta (Equity Beta) measures the volatility of a company’s stock including the risk added by its financial debt obligations. Unlevered Beta (Asset Beta) measures pure business risk by removing the impact of financial leverage debt.
Why do M&A analysts unlever peer group Betas?
In valuation practice (such as private company valuation), peer companies have vastly different capital structures. Valuation analysts unlever all peer group Betas to find the industry average Asset Beta, then re-lever that average Beta using the target company’s specific capital structure.
Can Unlevered Beta ever be higher than Levered Beta?
Assuming positive debt and tax rates, Unlevered Beta is always lower than or equal to Levered Beta. Financial leverage adds financial distress risk to equity holders, amplifying stock price volatility.