Levered and Unlevered Beta

A company’s observed beta reflects both its business risk and how much debt it carries. To use comparable companies for a private business, analysts unlever each comparable’s beta, average them, and relever the result at the private company’s own debt-to-equity ratio. A common formula is levered beta = unlevered beta × (1 + (1 − tax rate) × debt / equity).

More debt raises the levered beta and so the cost of equity, which offsets much of debt’s apparent cost advantage in WACC. What remains is chiefly the tax shield on interest.