Unlevered beta - taxes or not?

CFA Level II Equities
#1

All, on Schweser book 3 p.25, there is a small section on Betas. They give us the formula for calculating Betas for nonpublic or thinly traded stocks. In this formula, differently from L1, they do not include taxes on the formula for levering up and unlevering Beta. Why is that? How do I know when to use each formula?

Thanks!

#2

Use the Level I formula at Level I, and the Level II formula at Level II.

#3

Okay, but any explanation for that?

Thanks!

#4

The correct form is adjusting for taxes “(1-t)*D/E”. However, the assumption for this is that the level of debt is constant over time, so you can, with relative confidence, say that the tax shield is “affecting” beta in a equal way along the time.

Thinly traded stocks or nonpublic companies could show unstable behaviors with their debt notes, thus better don’t adjust for taxes because the above explanation.

Wanna read the source?

Go to 2016 CFA L2 Curriculum, Book 4, Reading 30, page 73, foot note 41

Hope this help

#5

Thanks bro!