Unlevered / Relevered Beta Calculator
When bankers are building a Discounted Cash Flow (DCF) model, they need to calculate the Weighted Average Cost of Capital (WACC). To get WACC, you need the Cost of Equity. To get the Cost of Equity, you need Beta.
Beta is essentially a measure of how volatile a stock is compared to the overall market. But there’s a massive catch: a company’s raw, “levered” beta (the one you pull from Bloomberg or Yahoo Finance) is skewed by how much debt the company has. Debt adds financial risk, which pushes the beta up.
If you want to understand the pure, underlying risk of the company’s actual business operations, you have to strip that debt out.
Unlevered vs. Relevered Beta Explained
Think of unlevering beta like stripping a house down to its foundation. By removing the financial risk of the capital structure, you are left with the Asset Beta (Unlevered Beta)—a pure metric of how risky it is to operate in that specific industry.
But you don’t stop there. Once you have the pure operating risk from a peer group of companies, you have to rebuild the house. You relever that beta using your target company’s specific tax rate and target Debt-to-Equity ratio. This gives you a custom beta that perfectly reflects the risk of your target company’s specific capital structure.
Why This Calculator Saves You Time
Bankers use the Hamada Equation to do this, and while the math isn’t rocket science, setting it up repeatedly when screening comps is a drag. This tool is designed for speed. Simply drop in the public company’s current levered beta, its current D/E ratio, and its tax rate. The calculator instantly strips the debt away to give you the Unlevered Beta. Then, plug in your target D/E ratio, and it instantly relevers it. It’s the perfect sanity-check tool before you hardcode numbers into a live pitch deck.
Frequently Asked Questions (FAQ)
1. What does an Unlevered Beta tell you?
It represents the pure operating risk of a business, ignoring how the business is financed. It allows you to compare the core risk of different companies in the same industry on an apples-to-apples basis.
2. Why do we relever beta in a DCF?
Because the target company you are valuing has (or will have) its own specific mix of debt and equity. You relever the industry beta to match the target company’s specific capital structure risk.
3. What is the Hamada Equation?
It’s the standard financial formula used to unlever and relever beta. It mathematically separates the financial risk of leverage from the fundamental business risk.
4. Can Unlevered Beta be higher than Levered Beta?
Typically, no. Because debt adds financial risk, Levered Beta is almost always higher than Unlevered Beta. The exception is if a company has negative net debt (more cash than debt), which is rare in this specific calculation context.
5. Where do I find the initial Levered Beta?
You pull the current Levered Beta from financial data providers like Bloomberg, Capital IQ, FactSet, or even free sites like Yahoo Finance.