What is the formula for Un-Levered Beta?

What is the formula for Un-Levered Beta?

• A. Levered Beta x (1 + (Tax Rate x (Total Debt/Equity)))
• B. Levered Beta / (1 + (Tax Rate x (Total Debt/Equity)))
• C. Levered Beta + (1 - Tax Rate)
• D. Levered Beta - (Total Debt/Equity)

Answer: (B)

The formula for Un-Levered Beta is correctly represented by the division of Levered Beta by the term \( (1 + (Tax Rate \times (Total Debt/Equity))) \). This formulation allows for the isolation of the intrinsic business risk of the company, independent of the capital structure, thus removing the effects of financial leverage. Unlevered Beta reflects the volatility of a company's stock relative to the market, assuming no debt is present. By using Levered Beta—which incorporates the risk associated with the company's leverage—divided by the outlined term, you adjust for the financial risk introduced by debt. The factor \( (1 + (Tax Rate \times (Total Debt/Equity)) \) operates as a lever to modulate the risk profile back to an all-equity basis. The essential concept behind unlevering beta is to indicate how much volatility is due purely to the company's operational performance and business risks, rather than its financial structure. This is especially important for analysts or investors who aim to evaluate a firm on its operational merits without the influence of leverage. The other choices do not accurately reflect the relationship necessary for deriving Un-Levered Beta. Instead, they either inaccurately combine elements of financial metrics or misinterpret how beta

The formula for Un-Levered Beta is correctly represented by the division of Levered Beta by the term ( (1 + (Tax Rate \times (Total Debt/Equity))) ). This formulation allows for the isolation of the intrinsic business risk of the company, independent of the capital structure, thus removing the effects of financial leverage.

Unlevered Beta reflects the volatility of a company's stock relative to the market, assuming no debt is present. By using Levered Beta—which incorporates the risk associated with the company's leverage—divided by the outlined term, you adjust for the financial risk introduced by debt. The factor ( (1 + (Tax Rate \times (Total Debt/Equity)) ) operates as a lever to modulate the risk profile back to an all-equity basis.

The essential concept behind unlevering beta is to indicate how much volatility is due purely to the company's operational performance and business risks, rather than its financial structure. This is especially important for analysts or investors who aim to evaluate a firm on its operational merits without the influence of leverage.

The other choices do not accurately reflect the relationship necessary for deriving Un-Levered Beta. Instead, they either inaccurately combine elements of financial metrics or misinterpret how beta