 # Asset Beta Versus Unlevering/Relevering Beta

Could some really smart future Level 3 candidate please help me remember the differences in the two different beta measurements? I.E. unlevering and relevering versus asset and equity betas? I tend to get these confused. Unlevering beta you take levered beta / 1 + D/E, and then to lever you take unlevered beta * 1 + D/E I mix this up with the Asset vs. Equity betas in a later reading, where its something like equity beta = asset beta / WEIGHT Equity. Can someone give me a side by side so i stop screwing these up? I also keep having issues because in the real world unlevered beta is actually Levered / [(1+D/E) * 1-t] , but the CFA doesn’t recognize the tax adjustment.

Asset beta is the unlevered (i.e., no debt = risk of asset only). Equity beta = levered beta (incorporates additional financial risk through debt financing). As far as the calculation goes, I thought I remember that the books do include the tax adjustment as that is a component of the calculation derived by Hamada. The only reason I can think of to not include the tax adjustment is if there is uncertainty as to the ability to realize the tax benefit of debt.

That answer is wrong, unlevered beta does not equal asset beta, one uses weights and one uses d/e ratios.

markCFAIL Wrote: ------------------------------------------------------- > That answer is wrong, unlevered beta does not > equal asset beta, one uses weights and one uses > d/e ratios. From Damodaran: “The unlevered beta is often also referred to as the asset beta since its value is determined by the assets.”

Asset Beta IS unlevered beta as DarienHacker states: Levered beta = Unlevered beta*(1+D/E) Equity beta = asset beta/weight Equity These are the same equation: (1+D/E) = E/E + D/E or (E+D)/E if you take the reciporical of this [ie E/(E+D)] you get the weight of equity. So Unlevered beta*(1+D/E) = Unlevered Beta / [E/(E+D) or Asset Beta/Weight Equity

What study section is this in?

Thx FinNinja, my misunderstanding…

is just to remember: unleveled beta * financial leverage = leveled beta? I did some conversion on the equation and get it.

financial leverage is asset / equity, not (1+D/E) which is what you need to do to lever beta.

I believe maybe you can think (1+D/E) as (E+D)/E then equal to Asset/Equity?

Anyone, what study session or volume is this from? I don’t seem to remember it, and when I do a search on the curriculum I’m not getting any hits. There is a lot of discussion so I’d like to review it. Thanks

It was Corporate finance for level 1. You will see it in private equity for level 2.

Soddy thanks, although I didn’t find it in the Private Equity Evaluation reading. I kept digging, I found the formula’s presented above in Volume 4 (Equity) under the reading Return Concepts. They are formula 9a and 9b. Where does it say we need to calculate this? In the LOS it says “discuss beta estimation for public companies, thinly traded public companies, and nonpublic companies;”

Whether or not you include the tax adjustment depends on if you assume the relevant risk of the cash flows from tax shields to be equal to zero or equal to the risk of the asset cash flows… I found some derivation that I seem to recall

pgh.ndt same formula is used in the Private Equity Valuation (in Alt Investments) under the LBO methodology. [Appendix in the CFA texts].

Can someone please explain why: unlevered beta = asset beta. is this beta of total firm assets, or of a single asset? Also, can someone explain why (if above post from FinNinja is correct) equity is leveraged? -->is it because equity holders receive income based on the whole firm while debt holders recieve just interest/principal payments?