Unlevering Beta

1
Unlevering Beta

• If debt has no market risk, you can unlever
  equity Beta (BL) as follows
•  
• Bu BL / 1 (1-t)(D/E)
•  
• Where t is the tax rate and BL is the observable
  levered Beta of equity.

2
Unlevering Beta

• If debt has market risk measured as Bd then can
  unlever equity Beta (BL)as follows
•  
• Bu BL Bd (1-t) (D/E) / 1 (1-t)(D/E)
•  
• Where t is the tax rate and BL is the observable
  levered Beta of equity.
•  

3
Practice Applications

• Compute the Unlevered Beta for the stock you
  picked for our stock picking contest.
• What would be the relevered Beta for a project
  that will use 70 debt?
• Assuming Debt has no market risk
• Assuming Debt has a Beta equal to .20
• What would the WACC be for the project for each
  scenario mentioned above?
• Check the answers of group members and have them
  check your answers. Call the professor if a
  consensus cant be reached for a correct answer.