The equity beta is the volatility of a company’s stock compared to the broader market. A beta of 2 theoretically means a company’s stock is twice as volatile as the broader market. Levered beta is characterized by two components of risk: business and financial. Business risk includes company-specific issues, while the financial risk is debt or leverage related. If the company has zero debt, then unlevered and levered beta are the same. Unlevered beta shows the volatility of returns without financial leverage. Unlevered beta is known as asset beta, while the levered beta is known as equity beta.
Unlevered beta = Levered beta / [1 + (1 - Tax rate) * (Debt / Equity)]
Levered beta = Unlevered beta * [1 + (1 - Tax rate) * (Debt / Equity)]
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