If you google the equation, and/or read any valuation book by Damodaran (Professor at NYU Stern), then you’ll see that to unlever beta one includes (1-t). For example: unlever beta = levered beta / [1+ D/E * (1-t)] check out powerpoint here --> http://pages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/pvt.pdf So, why does Schweser leave it out? I’m referring to the equation on pg. 50 in book 3. They also leave it out of the video lecture. I’m not sure if CFAI leaves it out as well and I can’t check right now because I left my CFAI book at work. At the end of the day, I’ll do whatever CFAI put in the book since they are the ones writing the test, but (1-t) should be included in the equation to unlever and relever beta.
CFA also leaves it out Damodaran is GOD I have one book about valuation written by him, I used it in a university course. In three hundred pages he pretty much covers 90% of Levels I and II and explains things they dont explain as well? WTF? If I remmber right, he even shows you how the lever/unlever formula is derived… CFA books blow
Yeah - but like all economic theories, there are perspectives and assumptions. If we use the tax adjustment, what rate - the public company’s or private company’s rate? If they are same, no difference because we did not use it when we unlevered the beta and don’t use it for re-levering. If they are different, then it would make a difference. However, the D/E would then have to be optimal not current… My 2 cents, if CFAI says it is night at noon, I say, yessir…until June 5
OP is wrong - You only use (1-t) if you assume that in the future you will not change your capital structure or taxes paid. Otherwise, you leave it out. To have (1-t) in there you have to do a lot more analysis and many places just leave it out. Both are methods are correct as long as you are consistent.
a lot of places leave out (1-t)? Are you speaking from a practical or theortical point of view? CFAI and finance textbooks teach you theory… I mean, if you think you are right, then that’s cool but google, investopedia.com, and Damodaran would disagree with you…along with a lot of other finance textbooks.
well all those place you mentioned are wrong. real valuation books teach you how to do it correctly. (1-t) is used only if you plan on keep the amount of debt fixed. if you plan on keeping a target capital structure, like most companies do, then you do not use (1-t). but if you want to trust a bunch of sites that all probably look to each other for info, go right ahead. CFA leaves it out because that is the correct way to do it. its just math, the (1-t) cancels when you go through the derivation.