The unlevered beta calculator separates two things that an observed equity beta mixes together: the risk of the business itself, and the risk added by how that business is financed. A company with a lot of debt has a more volatile equity than an otherwise identical company with none, because fixed interest obligations amplify whatever the operations do. Unlevering removes that amplification and leaves the asset beta — the beta the equity would have if the company carried no debt at all.
At Arb Digital we build free tools that name their conventions, and this one needs it more than most, because the formulas in circulation genuinely differ. Some assume debt has zero beta and some do not; some include the tax shield and some deliberately omit it. This page implements one specific published form and states it plainly, so you know what you are comparing against. Every input is yours; the page publishes no market data and recommends nothing.
What This Unlevered Beta Calculator Does
You enter an observed equity beta, the company's current debt-to-equity ratio and its marginal tax rate. The calculator divides the equity beta by the unlevering factor — one plus one minus the tax rate, times debt-to-equity — to produce the unlevered beta. It then multiplies that asset beta by the same expression built from a target debt-to-equity ratio and target tax rate to produce a relevered beta. The bars compare all three so the size of the leverage effect is visible rather than implied.
This is a different job from measuring a beta or aggregating one. Our stock beta calculator regresses paired stock and market returns to produce a raw levered beta for a single security — that raw beta is the input this page expects. Our portfolio beta calculator combines levered betas by weight across holdings, which is the right treatment when you actually own the levered equity. Unlevering is for comparison between businesses, not for aggregation. One name to set aside: the live beta distribution calculator deals with the Beta probability distribution and is unrelated to any of this despite the shared word.
How to Use It
- Enter the observed equity beta. Use a raw or adjusted beta consistently, and note which one you used — an adjusted beta has already been pulled toward one, and unlevering it produces an asset beta on a different basis.
- Enter debt-to-equity as a ratio. Use market value of debt over market value of equity where you can. Book equity is common in practice and produces a different, usually higher, ratio.
- Enter the marginal tax rate. The rate that applies to the next unit of income, because that is the rate at which interest is actually deductible.
- Set the target capital structure. This is where you want the asset beta relevered to — a peer's gearing, a post-transaction structure, or a long-run target.
- Read all three betas. The gap between levered and unlevered is the leverage effect you removed; the gap between unlevered and relevered is the one you added back.
The Formula — Which Convention This Page Uses
This calculator implements the Hamada equation in its standard published form: levered beta equals unlevered beta multiplied by one plus one minus the tax rate, times the debt-to-equity ratio. Rearranged, the unlevered beta is the levered beta divided by that same factor. The relationship combines the Modigliani-Miller propositions with the capital asset pricing model. The practitioner treatment — how comparable-company betas are unlevered, averaged and relevered in real valuation work — is documented on Aswath Damodaran’s NYU Stern Data for current year page, and the wider corporate-finance framing is covered through the CFA Institute professional learning library.
Two assumptions are baked into that form and you should know both. Debt beta is assumed to be zero — the debt is treated as riskless, so all the systematic risk of the assets is borne by the equity. For an investment-grade borrower that is a reasonable simplification; for a highly leveraged or distressed borrower it is not, because the debt itself starts moving with the market and a portion of the asset beta genuinely sits there. The alternative formulation, which subtracts a debt beta term, produces a higher unlevered beta for the same inputs. The tax shield is assumed to be as risky as the debt, which is what puts the one-minus-tax term in the factor. The Harris-Pringle variant drops it entirely on the view that the shield is as risky as the assets, and gives a lower unlevered beta. Neither is universally correct, and comparing an unlevered beta from one convention with one from another is a real error.
A Worked Example
Take the defaults. The observed equity beta is 1.30, debt-to-equity is 0.60, and the marginal tax rate is 25 per cent. The unlevering factor is one plus 0.75 times 0.60, which is 1.45. Dividing 1.30 by 1.45 gives an unlevered beta of 0.8966. That is the beta of the underlying business, with financing removed.
Now relever it into a target structure with debt-to-equity of 0.25 at the same 25 per cent tax rate. The relevering factor is one plus 0.75 times 0.25, which is 1.1875. Multiplying 0.8966 by 1.1875 gives a relevered beta of 1.0647. The same business, financed more conservatively, carries an equity beta about 0.235 lower than the observed one — a difference of roughly eighteen per cent, entirely attributable to capital structure rather than to anything the company does.
Run it in the other direction to see the asymmetry. Relever the same asset beta at a debt-to-equity of 2.0 and the factor becomes 2.5, producing an equity beta of 2.2414. Doubling gearing again to 4.0 produces 3.5862. The relationship is linear in debt-to-equity, so each additional unit of gearing adds the same increment — but because debt-to-equity itself rises without bound as equity shrinks, equity betas of heavily geared companies get large quickly.
Why Unlever at All
The usual reason is comparison. If you are estimating a cost of equity for a private company, a division, or a business with no traded shares, you cannot regress its returns against an index because there are none. The standard workaround is to take a set of listed comparables, unlever each of their equity betas to strip out their individual financing choices, average or median the resulting asset betas to get a business-risk estimate for the sector, then relever that at the target company's own capital structure. Without the unlevering step you would be importing the comparables' gearing decisions along with their business risk, which is not what you wanted.
The same logic applies inside a transaction. A leveraged acquisition changes the target's capital structure materially, so the beta observed before the deal is the wrong input for the cost of equity afterwards. Unlever at the current structure, relever at the post-deal structure, and the resulting beta feeds the CAPM calculator to produce a cost of equity, which in turn feeds the WACC calculator as the equity component. The debt to equity ratio calculator produces the gearing input, and the effective tax rate calculator is a useful cross-check — though remember the formula wants the marginal rate rather than the effective one.
Where the Formula Gets Fragile
Several situations deserve caution. Negative equity makes debt-to-equity negative and the factor can fall below one or turn negative, producing an asset beta larger than the equity beta or a sign flip. The formula has nothing sensible to say there; the calculator flags a zero factor and refuses to divide, but a small positive factor still returns a number you should distrust. Very high gearing pushes the debt beta assumption past breaking point: once a company's debt trades like equity, treating it as riskless assigns all the asset risk to a shrinking equity base and overstates the unlevering.
Book versus market values change the answer materially. Market-value debt-to-equity for a profitable listed company is usually far below its book equivalent, and using book equity produces a systematically lower unlevered beta. Whatever you choose, apply the same basis to every comparable in the set. Cash is a further wrinkle: a company holding substantial net cash has an asset beta diluted by an asset with a beta of zero, and some practitioners adjust for it explicitly by using net debt or by grossing up for the cash balance. This page does neither, because both choices belong to the analyst rather than to the formula.
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Talk to Arb Digital All Free ToolsCommon Mistakes to Avoid
- Entering debt-to-equity as a percentage. Typing 60 rather than 0.60 destroys the result completely, and the output still looks like a number.
- Using the effective tax rate. The formula wants the marginal rate at which interest is deductible. Effective rates contain one-off items and prior-year adjustments.
- Mixing conventions across comparables. Unlevering one peer with the tax term and another without it produces an average of two incompatible quantities.
- Applying it to a distressed company. The zero-debt-beta assumption fails exactly where leverage is highest, which is where people most want to use the formula.
- Forgetting to relever. An asset beta is not a cost-of-equity input. It has to be relevered at the subject company's own structure before it goes into CAPM.
Related Free Tools From Arb Digital
For the levered beta this page consumes, use the stock beta calculator; for combining betas across a portfolio, the portfolio beta calculator. Downstream, the CAPM calculator turns a beta into a required return and the WACC calculator blends it with a cost of debt. The debt to equity ratio calculator and enterprise value calculator supply the capital structure inputs, and the Treynor ratio calculator uses beta on the performance side. See the free tools hub for the rest.
Frequently Asked Questions
Unlevered beta, also called asset beta, is the beta a company's equity would have if it carried no debt. It isolates the systematic risk of the business itself by removing the amplification that financial leverage adds to an observed equity beta.
The Hamada equation in its standard form: levered beta equals unlevered beta times one plus one minus the tax rate, times debt-to-equity. It assumes debt beta is zero and that the interest tax shield carries the same risk as the debt.
Because the conventions differ. Some formulations subtract a non-zero debt beta, and the Harris-Pringle variant omits the one-minus-tax term on the view that the tax shield is as risky as the assets. Each produces a different figure from identical inputs.
The marginal rate, because that is the rate at which the next unit of interest is actually deductible. Effective rates blend in one-off items, prior-year adjustments and foreign rate differences that have nothing to do with the tax shield on debt.
Market values are generally preferred, since beta itself is a market-based measure. Book equity is widely used in practice and usually gives a higher ratio and a lower unlevered beta. What matters most is applying the same basis to every company in a comparable set.
An asset beta cannot be used directly in a cost-of-equity calculation, because the equity being valued does carry the company's actual leverage. Relevering at the subject company's own capital structure restores that effect before the beta feeds into CAPM.
Less well. The formula assumes debt is riskless and carries no systematic risk, which breaks down as leverage rises and the debt starts behaving like equity. In those cases a formulation with an explicit debt beta is more appropriate.
This tool performs arithmetic on figures you enter and is for general education only. It is not investment, tax, accounting or financial advice, it recommends no security or strategy, and it publishes no market data. Speak to a licensed professional before making any decision.
