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Finance Calc Kit
Business

Unlevered Beta

Calculate a company unlevered beta (asset beta) using its levered beta, debt-to-equity ratio, and corporate tax rate.

%

Unlevered Beta (Asset Beta)

0.8602

Systematic risk of business assets, excluding capital structure effects.

Levered Beta Input

1.20

Equity beta before unlevering.

Debt-to-Equity Ratio

0.5000

Direct D/E input

Tax Shield Factor

0.7900

(1 - 21.0% tax rate)

Unlevering and Re-levering Steps

Hamada-style beta adjustment with tax shield on debt

  1. 1. Tax shield factor

    (1−T)=1−21.00100=0.7900(1 - T) = 1 - \frac{21.00}{100} = 0.7900

    The tax shield factor captures the after-tax benefit of debt financing at a 21.00% corporate tax rate.

  2. 2. Debt-to-equity ratio

    DE=0.5000\frac{D}{E} = 0.5000

    The capital structure uses a debt-to-equity ratio of 0.5000.

  3. 3. Unlevered beta (asset beta)

    βu=βl1+(1−T)×DE=1.201+0.7900×0.5000=0.8602\beta_u = \frac{\beta_l}{1 + (1 - T) \times \frac{D}{E}} = \frac{1.20}{1 + 0.7900 \times 0.5000} = 0.8602

    Removing financial leverage from a levered beta of 1.20 yields an unlevered beta of 0.8602.

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What is unlevered beta?

Unlevered beta, also called asset beta, measures the systematic risk of a company's operating assets before the effects of financial leverage. Equity beta (levered beta) rises when a firm uses more debt because shareholders bear both business risk and the volatility created by leverage. Unlevering strips out that capital structure effect so you can compare core business risk across companies with different debt levels.

Analysts use unlevered beta in comparable company analysis, merger models, and cost of equity estimates under CAPM. After finding asset beta, you can re-lever it to a target capital structure when valuing a project or acquisition. Pair this with the stock beta calculator, the cost of equity calculator, and the CAPM calculator for a full equity discount rate workflow.

Unlevering formula (Hamada equation)

The standard unlevering adjustment accounts for the tax deductibility of interest. Given levered equity beta, debt-to-equity ratio, and corporate tax rate:

βu=βl1+(1−T)×DE\beta_u = \frac{\beta_l}{1 + (1 - T) \times \frac{D}{E}}

Where βu\beta_u is unlevered beta, βl\beta_l is levered (equity) beta, TT is the corporate tax rate, and D/ED/E is the debt-to-equity ratio using market values.

Re-levering to a target capital structure

Once you have asset beta, multiply by the same leverage factor using your target D/E and tax rate to estimate equity beta under a new capital structure:

βl=βu×[1+(1−T)×DE]\beta_l = \beta_u \times \left[1 + (1 - T) \times \frac{D}{E}\right]

This is the reverse of unlevering. Use it when a project will be financed differently from the comparable peer group, or when modeling a post-transaction capital structure in a pre and post money valuation scenario.

Worked example

Suppose a comparable stock has levered beta 1.20, debt-to-equity ratio 0.50, and a 21% corporate tax rate. The tax shield factor is (1 - 0.21) = 0.79. The leverage multiplier is 1 + 0.79 × 0.50 = 1.395.

βu=1.201.395≈0.8602\beta_u = \frac{1.20}{1.395} \approx 0.8602

The unlevered beta of about 0.86 reflects lower systematic risk in the underlying business than the 1.20 equity beta suggests. If you re-lever to a target D/E of 0.80 at the same 21% tax rate, target levered beta becomes about 0.8602 × (1 + 0.79 × 0.80) ≈ 1.40.

Ratio vs dollar inputs

You can enter D/E directly when you already know the ratio from filings or market data. Enter total debt and shareholders' equity when you have balance sheet or market cap figures and want the calculator to derive D/E automatically. Market values are preferred over book values because beta reflects investor expectations about risk and capital structure.

Frequently asked questions

Why does debt increase levered beta?
Debt amplifies the sensitivity of equity returns to market moves. Fixed interest obligations increase the volatility of net income available to shareholders, so equity beta exceeds asset beta when leverage is present.
Why is (1 - T) included in the formula?
Interest expense is tax deductible in most jurisdictions, so debt is less risky to the firm than the nominal coupon suggests. The (1 - T) factor adjusts the leverage effect for this interest tax shield.
Should I use book or market values for D/E?
Market values are standard in valuation. Use market capitalization for equity and the market value of interest-bearing debt. Book values can misstate leverage when stock prices or credit spreads differ from accounting carrying amounts.
When should I re-lever beta?
Re-lever after unlevering peer betas when your subject company or project will operate at a different target capital structure. This is common in LBO models, acquisition pro formas, and project finance with non-industry leverage.
Can unlevered beta be negative?
Yes, if the levered beta is negative. Negative betas are uncommon but can occur for certain hedged or inverse strategies. The unlevering formula still applies algebraically.
Are my inputs saved on a server?
No. All calculations run in your browser. Inputs sync to the URL so you can bookmark or share a scenario.

Resources and references

The formulas and methods in this calculator were checked against these independent sources.