Unlevered beta

Last updated: 16.03.2016

Unlevered beta is beta of the traded company exposed to the similar business risk as our company or our new investment which has been adjusted (unlevered or ungeared) for the effect of financial risk by using a formula (41):

 

 

βu – unlevered beta

βi – beta of the comparable company

 

As the result, unlevered β (βu) does not contain the effect of the specific capital structure of similar company and shows only the systematic business risk present in the market (industry).

 

This unlevered beta can be then, by using another formula shown below, transferred (relevered or regeared) to the specific capital structure of the considered company (to reflect the financial risk of the considered company) (41)

 

By using this beta in WACC formula we obtain risk adjusted WACC which is used to evaluate projects exposed to different systematic business risk than other activities currently undertaken by the company.

 

This procedure is often used to ascertain beta of:

  • the entire considered untraded company
  • investment projects that have different business risk than other activities currently undertaken by the company

 

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Used sources:

41. Unlevered beta (online).  Citation date: 1.2.2016. Available from www: https://www.educba.com/unlevered-beta/



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