Unlevered Beta

Unlevered beta, or asset beta, is a company's beta with the effect of debt removed. It reflects only the risk of the business itself. Analysts use it to compare companies that borrow different amounts and to build a beta for a private firm.

To unlever, divide the levered beta by 1 + (1 - tax rate) x D/E. A stock with a levered beta of 1.2, a debt-to-equity ratio of 0.5 and a 21% tax rate has an unlevered beta of 1.2 / 1.395, or about 0.86. This version of the formula assumes the company's debt has a beta of zero.

The usual workflow is to unlever betas from several public peers, average them, then relever at the target company's own debt level using the Hamada equation for levered beta. The levered vs unlevered beta guide walks through it, and cost of equity for a private company shows where it fits.