About Levered Beta Calculator (Formula)
The levered beta calculator is a tool used in finance to estimate the risk of an investment with debt or leverage. It calculates the levered beta, which is a measure of the sensitivity of an asset’s returns to changes in the overall market returns when debt is taken into account.
The formula for calculating the levered beta is as follows:
Levered Beta = Unlevered Beta * (1 + (1 – Tax Rate) * (Debt / Equity))
In this formula:
- Unlevered Beta refers to the beta of the asset without considering the impact of debt. It represents the risk of the asset assuming it is financed entirely by equity.
- Tax Rate represents the applicable corporate tax rate.
- Debt refers to the total amount of debt used to finance the asset.
- Equity represents the total equity value of the asset, which is calculated as the asset value minus the debt.
The formula accounts for the fact that debt can amplify the volatility of an asset’s returns. The higher the debt-to-equity ratio, the higher the levered beta will be, indicating higher risk.
It’s important to note that the levered beta formula assumes a constant debt level and that the asset’s returns are linearly related to the market returns. Additionally, the levered beta is a forward-looking estimate based on historical data and may not accurately predict future risk.