Unlevering and Revelering Beta

CFA Level I Corporate Finance
#1

Can you please explain the logic behind the formulae?

(As of now I am memorizing the two formulae without clearly understanding the purpose behind the operations)

Please help

Thank you

#2

If you remove the factors of (1 – t), you’ll see that the formulae simply multiply or divide by (A/L). The (1 – t) factor is something that CFA Institute added a couple of years ago, presumably to account for the fact that interest is tax-decuctable whereas dividends are not. I’m not altogether certain how that translates to discounting the value of debt; I think that CFA Institute added it to make candidates’ lives just that little bit more difficult.

#3

Thanks a lot S2000magician.

Your clarification was very useful. I actually wrote the formulae, ignoring the (1-t) and found it easier to understand.

Thanks again…

#4

My pleasure.

#5

Equity beta is the comparable firms levered beta (Reflecting their own capital structure)

you unlever that beta to get Asset beta (no capital structure is reflected)

you then re-lever that beta to get Project beta (reflecting your own capital structure)