How to Calculate Levered Beta for a Firm

How can we calculate the Levered Beta for a firm?

With a debt to equity ratio of 120%, a tax rate of 30%, and an Unlevered Beta of 1.25, what formula do we use to find the Levered Beta?

Calculation of Levered Beta

In order to calculate the Levered Beta for a firm, we need to use the formula: Levered Beta = Unlevered Beta * [1 + (1 - tax rate) * (Debt/Equity)].

Explanation:

The Levered Beta, also known as the Equity Beta or geared beta, is a crucial measure that assesses the risk of an investment in comparison to the broader market. This metric is computed by multiplying the Unlevered Beta with the formula [1 + (1 - tax rate) * (Debt/Equity)].

Provided that the Unlevered Beta is 1.25, the firm's debt to equity ratio is 120% (or 1.2 in decimal form), and the tax rate is 30% (0.3 in decimal form), we can substitute these values into the formula: Levered Beta = 1.25 * [1 + (1 - 0.3) * 1.2] = 1.95. Therefore, the Levered Beta for the firm is 1.95.

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