From levered beta, the tax rate, and the debt-to-equity ratio, strip out the effect of debt to recover the unlevered (asset) beta.
Input Data
Results
At a glance:Unlevered beta removes the tax shield of debt from levered beta, isolating the business risk (asset beta): βU = βL / (1 + (1 − tax)·D/E).
Formula
unleveredBeta = leveredBeta / (1 + (1 − taxRatePct%) × debtToEquity)
How to Use
- Enter the levered beta.
- Enter the tax rate and debt-to-equity ratio.
- Read the unlevered (asset) beta.
FAQ
Why 'unlever' beta?
The market-observed beta (βL) mixes two risks: the company's own 'business risk' and the extra 'financial-leverage risk' from debt. The more a company borrows, the more shareholder returns swing, and the higher βL—but that comes from capital structure, not the business itself. Comparing βL directly across peers with very different debt levels conflates business and borrowing risk and distorts conclusions. After unlevering, βU (asset beta) reflects only business risk, letting firms of different leverage be compared on the same scale, and it is the clean starting point for 're-levering' to a target structure in valuation.
What does the (1 − tax rate) in the formula represent?
It reflects the interest tax shield. Corporate debt carries interest that is usually tax-deductible, so the government effectively shares part of the borrowing cost—that is the tax shield. Because the shield lowers the real burden of debt, it also weakens debt's amplification of shareholder risk, so the Hamada formula discounts it with (1 − tax rate). The higher the tax rate, the bigger the shield and the more debt's effect on beta is reduced. Hong Kong's standard corporate rate is 16.5%, so (1 − 0.165) = 0.835. Note this is a simplification; the real shield value also depends on profitability and debt sustainability.
How do I use the unlevered beta once I have it?
The classic use is the 'comparable-company method' to estimate the cost of equity: take several listed peers in a similar business, unlever each one's βL with this formula and average them to get a pure asset beta representing the industry's business risk; then re-lever it with the target company's own capital structure (D/E and tax rate) using the reverse formula to get a βL fitting the target; finally plug that βL into CAPM (Re = risk-free rate + β × (market return − risk-free rate)) to get the cost of equity, used for discounting or WACC. This isolates each firm's debt difference and makes the industry-risk estimate fairer and more reliable.
What exactly differs between levered beta (βL) and unlevered beta (βU), and why does debt affect beta?
The core difference is 'whether the risk from financial leverage (debt) is included'. βL (equity beta) is what we compute directly from a stock-price regression; it reflects the total systematic risk felt by shareholders, which mixes two sources: business risk (the business's sensitivity to the economy/market—cyclical industries high, utilities low) and financial risk (fixed interest obligations amplifying shareholder returns). βU strips out financial risk, leaving only business risk. Why does debt amplify beta? Imagine two identical businesses, one debt-free and one heavily borrowed. When times are good, the leveraged one pays fixed interest first and the rest goes to shareholders, amplifying returns; when bad, interest is still paid and shareholders bear a deeper fall. Debt acts like an amplifier of both upside and downside for shareholders, raising their volatility (beta). The heavier the debt (higher D/E), the stronger this effect and the higher βL sits above βU. That is why in βU = βL ÷ [1 + (1 − T) × D/E] the denominator grows with D/E—dividing out the amplification to recover the business risk. (1 − T) reflects the tax shield slightly easing debt's real burden, discounting the amplification. Use βU to compare business risk across firms (removing their debt differences); use a βL matching the firm's own structure for the shareholder's actual risk and cost of equity.
What tax rate should a Hong Kong company use, and why multiply by (1 − tax rate)?
On the rate: the Hamada formula's tax rate is the company's applicable 'profits-tax rate', because it concerns the interest-deductibility shield. Hong Kong has a two-tier profits tax: 8.25% on the first HK$2m of assessable profits and 16.5% above; the traditional 'standard rate' is 16.5%. In practice, valuation and unlevering usually take 16.5% as the representative marginal rate (for any sizeable firm above HK$2m, the next dollar of profit/interest deduction faces 16.5%); for a very small firm within the first HK$2m band you may use 8.25% or its effective rate. The key is to use the rate reflecting the marginal effect of interest deductibility, and keep it consistent across peers. This calculator defaults to 16.5%. Why multiply by (1 − tax rate)? It reflects the interest tax shield: interest is deductible in computing taxable profit, so the government 'collects less tax' and shares part of the borrowing cost. At 16.5%, every HK$100 of interest saves HK$16.5 of tax, the net interest burden is only HK$83.5. Because the shield lowers debt's real cost and burden, it also weakens debt's amplification of shareholder risk—so in the unlevering formula, (1 − tax rate) discounts debt's effect: higher tax, bigger shield, smaller (1 − tax rate), more the amplification is reduced. At Hong Kong's 16.5%, (1 − 0.165) = 0.835, meaning debt's risk amplification counts at only 83.5%. Note this is Hamada's simplification (fixed tax rate, zero debt beta); the real shield value also depends on profitability and the ability to use the deductions.
References
Content review: Calculatorism Finance Team. Results are for reference only; please refer to the relevant authorities for the official figures.