Levered / Unlevered Beta Calculator
The Hamada equation — adjust beta for a different capital structure.
How levering and unlevering beta works
A stock's observed beta blends two things: the risk of the underlying business, and the extra volatility added by its debt load. That makes raw betas hard to compare across companies with different capital structures — a highly leveraged company will show a higher beta than an otherwise identical unleveraged one. Unlevering strips out the leverage effect so betas are comparable on a like-for-like basis; levering does the reverse, applying a target capital structure back onto an unlevered beta. This is the standard bridge between a sector-average beta and a company-specific beta for use in CAPM.
The Hamada equation is: βL = βU × [1 + (1 − Tax Rate) × D/E]. Using this calculator's defaults — an unlevered beta of 0.95, a debt-to-equity ratio of 0.4, and a 25% tax rate — the levered beta is 0.95 × [1 + (1 − 0.25) × 0.4] = 0.95 × 1.3 = 1.235. That levered beta is higher than the unlevered beta because leverage amplifies the equity's exposure to the underlying business risk.
The unlevering direction reverses the formula: βU = βL / [1 + (1 − Tax Rate) × D/E]. For a practical workflow: find a set of comparable public companies in the Sector Beta tool, which provides average unlevered betas by industry. Then relever to your own company's D/E ratio here to get a company-specific equity beta. Feed that into CAPM to estimate your cost of equity, and combine it with your cost of debt in the WACC calculator for a full cost of capital. For example, if a technology sector peer has a levered beta of 1.4 with D/E = 0.6 and a 28% tax rate, its unlevered beta is 1.4 / [1 + (1 − 0.28) × 0.6] = 1.4 / 1.432 ≈ 0.978. Reapplying your company's D/E of 0.2 at the same tax rate gives a levered beta of 0.978 × [1 + 0.72 × 0.2] = 0.978 × 1.144 ≈ 1.119 — a meaningfully different starting point for CAPM than using the peer's raw beta.
Frequently asked questions
- What does levering/unlevering a beta mean?
- Beta reflects both business risk and financial (leverage) risk. Unlevering strips out the leverage effect so betas from companies with different capital structures can be compared apples-to-apples; levering re-applies a target capital structure's leverage to that unlevered beta.
- When would I use this?
- Common workflow: take an unlevered beta from a sector average (see the Sector Beta tool), then lever it to your own company's debt-to-equity ratio to get a company-specific beta for CAPM.
- What is the difference between levered and unlevered beta?
- Levered beta (also called equity beta) is the beta observed in the market for a company's stock — it reflects both the underlying business risk and the extra volatility added by debt. Unlevered beta (asset beta) strips out the leverage effect, isolating just the business risk.
- Why do we unlever beta before re-levering it?
- Because a company's observed beta is distorted by its specific capital structure. Unlevering removes that distortion so you can compare betas across companies with different debt levels, or apply a peer/sector beta to a company with a different capital structure than the peer group.
- What is the Hamada equation?
- The Hamada equation, developed by Robert Hamada, relates levered and unlevered beta through a company's debt-to-equity ratio and tax rate: βL = βU × [1 + (1 − Tax Rate) × D/E]. This calculator applies it in both directions.
- Where do I find a company's debt and equity values?
- Debt-to-equity is usually calculated from the balance sheet — total debt divided by shareholders' equity — or you can use market values of debt and equity if you have them, which is theoretically more accurate for this calculation.
- What does a beta greater than 1 mean?
- A beta above 1 means the stock has historically been more volatile than the overall market — it tends to amplify market moves in both directions. A beta below 1 means the stock is less volatile than the market; a beta of exactly 1 means it moves in line with the market.
- How does beta feed into CAPM?
- Beta is the risk multiplier in the CAPM formula — it scales the equity risk premium (the extra return the market demands over the risk-free rate) to reflect how risky this specific stock is relative to the market. See the CAPM calculator to turn a levered beta into an expected return.
- How does levered beta affect WACC?
- Levered beta feeds into WACC through the cost of equity: CAPM uses the levered beta to estimate the return equity investors require, which is then weighted by the equity share of the capital structure. A higher levered beta raises the cost of equity and therefore WACC. See the WACC calculator to work through the full calculation.
- What is a typical unlevered beta by industry?
- Unlevered betas vary considerably by sector. Capital-light, recurring-revenue businesses (software, healthcare services) typically show unlevered betas of 0.6–0.9. Cyclical industries (mining, construction, semiconductors) often run 1.0–1.5. Utilities and regulated infrastructure can be below 0.4. Industry averages are available in the Sector Beta tool — use them as the starting point before applying your company's own D/E ratio.
- What D/E ratio should I use — book or market value?
- Market value is theoretically correct for both debt and equity: market equity is the share price times shares outstanding; market debt is the present value of future debt payments. In practice, book value of debt (total debt from the balance sheet) is often used as a reasonable approximation, especially when bonds are not frequently traded. The choice can materially affect the result for highly leveraged companies.
- What happens to levered beta if a company has no debt?
- If D/E = 0, the Hamada equation simplifies to βL = βU — levered and unlevered beta are identical. Debt is what introduces the amplification: as leverage rises, the levered beta diverges upward from the unlevered beta because equity holders absorb more of the business risk (debt holders get paid first). A zero-debt company's equity beta purely reflects business risk.