Hei guys !! i always get problems (as i am in initial stages) in unlevered - levered equity and assets. i know that unlevered assets + TX (tax shield) = Equity + debt (capital structure) of the firm but pls if anyone can explain me how is it unlevered assets when its debt included in the capital structure coz it makes the assets levered isnt it ?? Secondly same with levered/unlevered equity here i am reffereing to Miller and modigliani (when value of Levered firm is equal to unlevered firm) … thankyou
I am especially having trouble with "how is it unlevered assets when its debt included in the capital structure coz it makes the assets levered isnt it ?? "
The focus of levered/unlevered is the volatility of equity returns to the investor. In no-debt company, the owner enjoys exactly the cash flows thrown off by the assets. Say those cash flows are 10 +/- 1 each year. If the company has some debt, say 5 in interest payments each year, then the equity investor (ignoring taxes for now) receives 5 +/- 1 each year. The relative volatility of the equity returns has doubled (from 10% to 20%). So we say the levered equity beta is greater than the unlevered equity beta.