Unlevered beta company

dreampak

Unlevered beta = (1/(1+D/E) B_levered company

Isn't a short cut to this as follows?

Unlevered beta = E/100 B_levered company

Looks equal to me.

xilige

Now that's not working hard.. that's working smart... thanks man

scarecrow

This is why I was originally confused to why the change in formula...makes sense though if you can't remember the real one

I just wouldn't want to get confused when they throw the capital structure in various ways... D/E, or D/A et cetera.... be careful with these ratios more importantly in calculating WACC

A very common mistake people do is they use the D/E ratio in the weighting for Debt in calculating WACC rather than changing it to D/A (i.e., D/D+E)

I had a corporate finance class in my masters program and this kind of stuff is my favorite...corporate finance section is the bomb

ap0258

righto! its all about D/E ratio.

ninja1024

just to be sure....the one with the higher D/E, not the higher debt.

bingbingliang

Yep the one with the higher D/E is the one with the higher beta.

mp3bu

yeah I can remember it like this too. cool!

just to do an example, dreary i hope you are putting E as %.

so if
D = 20%
E = 80%
Beta = 1.2


UB = 80/100 * 1.2 ==> 4/5*1.2 = .96

If the other company we are trying to lever has D= 30%, E = 70%, then you get
leveredB = .96 / .7 = 1.37 which makes sense, cuz more Debt means higher beta? is that true?

Pegasus2008

I just tried this formula with D to E of 2 to 3 and it works... Both equal O.6 times levered beta

Only problem with this is that why bother changing the formula? In order to find out your total E you need to consider it in relation to assets and debt so it doesn't help you

ryanlb

D=1-E, do the math.

huangxiaoxie

why do you say E/100- unless you plan to replace E in percentage with respect to Total Market cap it will not hold