Levered Beta

Levered beta, also called equity beta, is the beta usually observed from a company's share price movements. It captures both business risk and financial risk from borrowing. A company with more debt generally has a higher levered beta than a similar company with less debt.

In valuation, analysts often relever an unlevered beta to match a company's target capital structure. The formula multiplies unlevered beta by one plus the debt-to-equity ratio multiplied by one minus the tax rate.

For example, with an unlevered beta of about 0.87, a target debt-to-equity ratio of 1.0 and a tax rate of 25%, the levered beta is about 0.87 multiplied by 1.75, or about 1.53.

Levered beta is then used in the Capital Asset Pricing Model to estimate the cost of equity. Because more debt raises levered beta, it also raises the cost of equity, which is one reason adding debt does not simply make a company cheaper to finance.