What this calculator does
Beta measures how much a stock moves relative to the overall market, but the beta you see quoted (the "levered" beta) is inflated by however much debt that company carries. The unlevered beta formula removes that leverage effect, leaving the risk that comes from the business itself, independent of how it happens to be financed.
This matters most when comparing companies in the same industry that carry very different amounts of debt. Two firms selling the same product can have wildly different levered betas purely because one borrows heavily and the other does not; unlevering both puts them on the same footing before re-levering to a target capital structure, which is the standard step in a comparable-company valuation.
The formula
Unlevered beta equals levered beta divided by one plus (one minus the tax rate) times the debt-to-equity ratio. The debt-to-equity term in the denominator captures how much extra volatility leverage has added; the tax rate is included because interest payments are tax-deductible, so only part of the extra risk from debt survives after tax.
| Term | Meaning |
|---|---|
| Levered beta | The observed beta of the stock as traded, including the effect of its actual debt load. |
| Unlevered beta (asset beta) | What that beta would be if the company had no debt at all, funded entirely by equity. |
| Debt / equity ratio | The market value of debt divided by the market value of equity, the leverage measure used in the formula. |
| Tax rate | The company's effective corporate tax rate, which determines how much of the interest tax shield offsets the extra risk from debt. |
The inputs explained
| Field | What to enter |
|---|---|
| Levered (observed) beta | The company's current observed (levered) beta, as reported by a data provider or estimated by regression against the market. |
| Tax rate (%) | The effective corporate tax rate the company pays. |
| Debt / equity ratio | The market value of debt divided by the market value of equity. Use 0 for an all-equity, debt-free company. |
When to use it
Comparing companies with different debt loads
Unlevering the betas of several companies in the same industry, then averaging those unlevered betas, gives an industry asset beta uncontaminated by any one company's particular financing choice.
Valuing a private or newly listed company
A private company has no market-traded beta of its own. The usual approach is to unlever the betas of comparable public companies, average them, and then re-lever that average to the private company's own target debt-to-equity ratio.
Testing how a capital structure change affects risk
Unlevering a company's current beta and then re-levering it at a proposed new debt-to-equity ratio shows how much a planned refinancing or buyback would be expected to move the stock's beta.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How unlevered beta falls as debt-to-equity rises
The same observed beta of 1.35, unlevered across a range of debt-to-equity ratios.
| Debt / equity ratio | Unlevered beta | Denominator [1 + (1 − T)×(D/E)] |
|---|---|---|
| 0.0 | 1.350 | 1.000 |
| 0.3 | 1.102 | 1.225 |
| 0.6 | 0.931 | 1.450 |
| 1.0 | 0.771 | 1.750 |
| 1.5 | 0.635 | 2.125 |
| 2.0 | 0.540 | 2.500 |
Questions
Why does the tax rate appear in the unlevered beta formula?
Interest on debt is tax-deductible, so part of the extra risk that debt adds to equity holders is offset by the resulting tax shield. Multiplying the debt-to-equity ratio by (1 − tax rate) accounts for only the after-tax portion of that extra leverage risk.
What is unlevered beta used for once calculated?
It is almost always a stepping stone: analysts unlever a set of comparable companies' betas, average the unlevered figures, then re-lever that average at the target company's own debt-to-equity ratio to estimate a beta appropriate for that specific capital structure.
Is unlevered beta the same as beta distribution?
No, and the names are unrelated. Unlevered beta is a corporate finance risk measure describing a stock's leverage-adjusted market risk. A beta distribution is a statistics concept, a probability distribution defined on the interval from 0 to 1, with no connection to companies, debt or equity markets.
Can unlevered beta be higher than levered beta?
Not under this formula when leverage is positive, since dividing by a value of 1 or more can only shrink or leave beta unchanged. Unlevered beta equals levered beta only when debt-to-equity is zero, and is always lower than levered beta whenever the company carries any debt.
Once you have an unlevered beta, use it as an input to CAPM after re-levering to the target company's own debt-to-equity ratio, or feed the resulting cost of equity into WACC.