Guide

How unlevered beta works

Published August 17, 2026

Unlevered beta is equity beta divided by one plus after-tax D/E. An equity beta of 1.2, a 25 percent tax rate, and D/E of 0.5 produce an asset beta of 0.8727. With no debt, asset beta equals equity beta. Debt beta is assumed to be zero.

Unlevered beta

0.8727

Hamada factor 1.375. Relevered at the same D/E is 1.20.

Equity beta: 1.20
1 + (1 minus t) times D/E: 1.3750
Asset beta: 0.8727

Equity beta

The levered beta. How the share moves with the market.

Tax rate

Debt to equity

D/E, not debt over total capital. 0.5 means fifty cents of debt per dollar of equity.

In short

Hamada's identity is $\beta_U = \beta_E / (1 + (1-t)(D/E))$ . Equity beta 1.2, tax 25 percent, D/E 0.5: the Hamada factor is 1.375 and asset beta is 0.8727.
Relevering at the same D/E returns 1.2. The round trip is a check that the factor was applied in both directions.
Set D/E to 0 and the Hamada factor is 1. Asset beta is 1.2, equal to equity beta. There was no financial leverage to strip.
Equity beta 1.5, tax 21 percent, D/E of 1: Hamada factor 1.79, asset beta 0.8380. Relevered at the same D/E is 1.5.
Unlevered beta is the beta of the operations. CAPM wants the equity beta of the claim you are pricing, after you relever at the target D/E.

Strip the financing out

Unlevered beta takes financial leverage out of an equity beta so that two firms with different D/E can be compared on the risk of their operations:

$\beta_U = \frac{\beta_E}{1 + (1-t)(D/E)}$

Debt beta is assumed to be zero, which is the Hamada teaching convention.

Equity beta 1.2, tax 25 percent, D/E 0.5. The Hamada factor is $1 + 0.75 \times 0.5 = 1.375$ . Asset beta is $1.2 / 1.375 = 0.8727$ . Relevered at the same D/E: $0.8727 \times 1.375 = 1.2$ .

The unlevered beta calculator on this page is that identity. How WACC works is where the relevered equity beta goes next: into the cost of equity, then into the weighted cost of capital. How leverage ratio works is the D/E sitting in the factor.

The 1.375 in the denominator has its own page. How the Hamada factor works owns that 1.375. This page owns the 0.8727 asset beta.

No debt, nothing to strip

Keep equity beta at 1.2 and tax at 25 percent. Set D/E to 0. The Hamada factor is 1. Asset beta is 1.2, equal to equity beta.

An all-equity firm has no financial leverage in the beta. Unlevering is a no-op. That is the check that the identity is doing what it claims: the gap between 1.2 and 0.8727 on the first sheet is the 0.5 D/E, not a change in the operations.

A higher beta on a more borrowed sheet

Equity beta 1.5, tax 21 percent, D/E of 1. The Hamada factor is $1 + 0.79 \times 1 = 1.79$ . Asset beta is $1.5 / 1.79 = 0.8380$ . Relevered at the same D/E is 1.5.

The equity beta is higher than 1.2 and the D/E is higher than 0.5. The asset beta, 0.8380, sits close to the first sheet's 0.8727. Most of the extra equity beta was financing, not operations. That is the point of unlevering before you compare two names, or before you relever a comparable's asset beta onto a target capital structure.

What this page is not doing

It is not a CAPM cost of equity, not a debt-beta estimate, and not a WACC. Distressed debt has a beta of its own. This page assumes it is zero. The three sheets are equity beta 1.2 with D/E of 0.5 (asset beta 0.8727), the same 1.2 with no debt (asset beta 1.2), and equity beta 1.5 with D/E of 1 (asset beta 0.8380). This is educational material, not financial advice.

Worked examples

Equity beta 1.2, tax 25 percent, D/E 0.5

Equity beta is 1.2, the tax rate is 25 percent, and debt-to-equity is 0.5. What is unlevered beta?

Hamada factor: $1 + (1 - 0.25)\times 0.5 = 1.375$ .
Asset beta: $1.2 / 1.375 = 0.872727$ , which prints as 0.8727.
The other walk, with E = 1 and D = 0.5: $1.2 \times 1 / (1 + 0.5\times 0.75) = 1.2 / 1.375$ .

Unlevered beta is 0.8727. The Hamada factor is 1.375. Relevered at the same D/E is 1.2.

The same beta with no debt

Keep equity beta at 1.2 and tax at 25 percent. Set D/E to 0. What is asset beta?

Hamada factor: $1 + (1 - 0.25)\times 0 = 1$ .
Asset beta: $1.2 / 1 = 1.2$ .

Asset beta is 1.2, equal to equity beta. There was no financial leverage to strip.

Equity beta 1.5, tax 21 percent, D/E 1

Equity beta 1.5, tax rate 21 percent, debt-to-equity 1. What is unlevered beta?

Hamada factor: $1 + (1 - 0.21)\times 1 = 1.79$ .
Asset beta: $1.5 / 1.79 = 0.837988$ , which prints as 0.8380.
Relevered: $0.8380 \times 1.79 = 1.5$ .

Unlevered beta is 0.8380. The Hamada factor is 1.79. Relevered at the same D/E is 1.5.

Common questions

Is this the beta I put into CAPM?

CAPM wants the equity beta of the claim you are pricing. If you are pricing the operations at a new capital structure, unlever, then relever at the target D/E, then put that equity beta into CAPM. Putting 0.8727, the asset beta, straight into CAPM prices the operations as if they were all-equity financed.

Why is debt beta assumed to be zero?

That is the Hamada teaching convention: debt is treated as risk-free for this identity. Distressed debt has a beta of its own. This page does not estimate one.

Where does the 0.8727 go next?

Into a relevering at the target D/E, then into the cost of equity, then into WACC. The WACC guide is the next page if the question is the weighted cost of capital.

Keep reading

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.