Unlevered Beta
Short definition
Unlevered (asset) beta is systematic operating risk with financial leverage stripped out. It is the common denominator for peer comparison; Ke is not computed on this beta directly.
Detailed explanation
Peers with different D/E are comparable only in β_U. Operating leverage stays inside β_U. A cash-rich balance sheet pulls observed beta down; strip excess cash.
Project β_U diverges from firm β_U by sector and operating leverage.
Why it matters for the CFO
A wrong unlever breaks the whole Ke chain. M&A needs β_U to relever at the target structure.
How it is calculated
β_U = β_L / [1 + (1−T)×D/E]
Variables in the formula
- β_U: Asset / unlevered beta
How to read it
β_U 0.8 is the operation’s market sensitivity. If β_L is 1.2, the gap is the leverage premium.
Numerical example
β_L 1.20, D/E 0.67, T 25% → β_U = 1.20 / [1 + 0.75×0.67] ≈ 0.80.
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Definitions are educational. They are not investment, credit or tax advice.