What is Unlevered Beta?

Unlevered beta measures a company's risk in relation to the market without considering its debt. It helps investors understand how much of the company's risk comes from its core business operations, excluding the effects of debt financing. Companies with a lower unlevered beta are typically less risky.

Unlevered Beta Formula

The formula to calculate unlevered beta is:

Unlevered Beta = Levered Beta / (1 + (1 - Tax Rate) × (Debt / Equity))

Where:

• Levered Beta: The company's beta considering its debt.
• Tax Rate: The company’s effective tax rate.
• Debt/Equity: The company's debt-to-equity ratio.

Example of Unlevered Beta Calculation

Let’s assume a company has a levered beta of 1.2, a tax rate of 30%, and a debt-to-equity ratio of 0.5. Using the formula:

Unlevered Beta = 1.2 / (1 + (1 - 0.30) × 0.5) = 1.2 / (1 + 0.35) = 1.2 / 1.35 ≈ 0.89

This means the unlevered beta of the company is approximately 0.89, indicating its core business has less volatility compared to the overall market when excluding debt.