What is a leveraged beta?

Usually, a beta equal to 1 indicates a stock’s risk equal to the market risk; a beta of less than 1 indicates a stock’s risk lower than the market risk, and a beta of greater than 1 indicates a stock’s risk greater than the market risk. To calculate the leveraged beta, we need to know the unlevered beta and the debt-to-equity ratio.

How is unlevered beta calculated?

Removing the debt component from the risk factor calculation gives the value of Unlevered Beta. Levered Beta is then calculated as a function of Unlevered Beta and a stocks debt to equity ratio.Levered Beta with a value of 1 has the same volatility as the stock market, hence it is considered a medium risk stock.

What is the difference between unlevered beta and debt-to-equity ratio?

Debt and equity are factored when assessing a company's risk profile. Unlevered beta strips off the debt component to isolate the risk due solely to company assets. High debt-to-equity ratio usually translates to an increase in the risk associated with a company's stock.

How to calculate leverage?

beta / 1 + (1 – tax rate) x (debt / equity) = 1.25 / 1 + (1 – 35%) x 13% = 1.33. Then, he calculates the levered beta formula of the stock. unlevered beta (1+ (1-t) (Debt/Equity)) = 1.33 x (1 + (1-35%) x 13% = 1.45. Then, he constructs an excel spreadsheet to calculate the effect of leverage based on different levels of debt, as follows: