Unlevered beta = (1/(1+D/E) B_levered company Isn’t a short cut to this as follows? Unlevered beta = E/100 B_levered company Looks equal to me.
why do you say E/100- unless you plan to replace E in percentage with respect to Total Market cap it will not hold
D=1-E, do the math.
I just tried this formula with D to E of 2 to 3 and it works… Both equal O.6 times levered beta Only problem with this is that why bother changing the formula? In order to find out your total E you need to consider it in relation to assets and debt so it doesn’t help you
Because now I can easily remember it. Unlevered beta = E/100 * B_levered company Then beta = Unlevered beta/E This will work unless D+E is not always equal to 1, which I’ve never seen it like that.
yeah I can remember it like this too. cool! just to do an example, dreary i hope you are putting E as %. so if D = 20% E = 80% Beta = 1.2 UB = 80/100 * 1.2 ==> 4/5*1.2 = .96 If the other company we are trying to lever has D= 30%, E = 70%, then you get leveredB = .96 / .7 = 1.37 which makes sense, cuz more Debt means higher beta? is that true?
Yep the one with the higher D/E is the one with the higher beta.
just to be sure…the one with the higher D/E, not the higher debt.
righto! its all about D/E ratio.
This is why I was originally confused to why the change in formula…makes sense though if you can’t remember the real one I just wouldn’t want to get confused when they throw the capital structure in various ways… D/E, or D/A et cetera… be careful with these ratios more importantly in calculating WACC A very common mistake people do is they use the D/E ratio in the weighting for Debt in calculating WACC rather than changing it to D/A (i.e., D/D+E) I had a corporate finance class in my masters program and this kind of stuff is my favorite…corporate finance section is the bomb
Now that’s not working hard… that’s working smart… thanks man