do you wonder why lever and delever...... different, example, forward, company, average

therecruit

Hi, I feel I should share this.

Do you wonder why CFAI often use some confusing formulas that are easy to forget or mis-apply rather than simple and straight forward ones.

My example is to "de-lever and re-lever" equity/asset beta when you are faced with different gearing.

CFAI uses Ba = (1/(1+d/e)) * Be (Ba = Beta of Asset/Company, Be = Beta of equity

where as, all we need to know is that the beta of any company is the weighted average of its Debt and equity beta.

Usually debt beta is judged to be zero, so the formula simplifies to

Ba = (e/(d+e))* Be.

for the re-levered company, just make Be the subject of formula and sub the new equity and debt ratio as follow;

Be =Ba((d'+e')/e')
(d' and e' are the debt and equity level/ratio- we can easily convert d/e to d/d+e)