Are we supposed to know this formula? How to unlever benchmark beta so that we can lever it back to financial company’s beta? (to value illiquid stocks).
it seems like it’s fair game. there was a question in Schweser exam 1 PM on this, but i think it was just knowing the qualitative part.
Its in the reading, so probably. but at least it is relatively simple to remember because of the components, you’re just adding back the debt component to an all equity Beta Levered Beta = Unlevered Beta x (1+D/E)
I guess it should be Levered Beta = Unlevered Beta x [1+(1-T)D/E]
easier to remember, Beta of teh project/or illiquid company = (1 + d’/e’) * (1 / (1+d/e) * beta of benchmark. where d’/e’ = debt to equity ratio of the company you are trying to measure beta for. got nothing to do with Taxes.
Pepp, It is amazing the way you build your own concepts. If my finance professor was right i know taxes are relevant. This link tells the same. I don’t know what CFAI recommends. But I doubt that they will ignore taxes. http://www.investopedia.com/terms/u/unleveredbeta.asp
oh for a second i thought you were complimenting me. LOL. in any case, i have a feeling that cfai book is either wrong, or assumes that taxes are same. but different tax rates can easily be incorporated, (1 + (1-t) d’/e’) * (1 / (1+(1-t)d/e)) * beta of benchmark.
footnote 40 in reading 36 of the CFAI books, says the expression incorporating taxes “is appropriate under the typically less plausible assumption that the level of debt is constant from period to period: Still assuming the beta of debt is zero, the correct expression to unlever is then… and re-leveraging is done using” the aforementioned expression