How to (un)lever betas
November 12, 2014
In this second part of our practitioner’s toolkit on valuation we addressed the issue how to (un)lever betas. The important insight is that the valuator first needs to identify the financial policies of both the comparable firms that are used to estimate the Asset or Unlevered beta, and also needs to determine the financial policy of the company that is being valued, to get the levered Equity beta.
Depending on whether the financial policy is to have a fixed (or known) level of Debt or a fixed Debt/Equity ratio, betas need to be (un)levered in different ways. This is similar to the consistency between different valuation methodsas discussed in Part I of this toolkit. Although we have illustrated the (un)levering of betas within the framework of the CAPM, the (un)levering works in the same way for other (multiple) beta pricing models.
A Practitioners Toolkit on Valuation, Part II: (Un)Levering Betas, de Roon van der Veer (2014)