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Finance · level 3

Unlevering and relevering beta

Peer betas carry peer debt. Divide out the leverage factor to get asset beta, then multiply it back at your own D/E before it enters CAPM.

Theory: Corporate Finance

Worked example: Levered β 1.8, D/E 0.3, tax 20%. Unlevered β?

levered β1.8
leverage factor1.24
unlevered β1.45

Step by step

  1. 1

    Hamada

    β_u = β_L / (1 + (1 − t) D/E)

  2. 2

    Denominator

    1 + 0.8 × 0.3 = 1.24

  3. 3

    Divide

    1.8 / 1.24 = 1.45

  4. 4

    Why

    Strip the peer's leverage out, then relever at the target's own capital structure.

Levered β 1.8, D/E 0.3, tax 20%. Unlevered β? = 1.45

The theory behind it

Intuition

Leverage magnifies equity risk. Unlevering strips financing out to get asset risk; relevering applies the target's own capital structure.

Common pitfalls

  • ×Comparing levered betas of peers with very different debt loads.
  • ×Dropping the tax term in the Hamada relation.

In the interview

Valuing a private company off listed comparables.