Unlevered beta: drag D/E
Drag debt-to-equity. Equity beta stays at 1.2 and tax at 25 percent, so asset beta moves only because the Hamada factor does. More borrowing means more of the 1.2 was financing, and the operations beta comes out lower.
Asset beta
0.8727
Hamada factor
1.375
Equity beta stays 1.2. At D/E of 0 the asset beta equals 1.2. Relevered at this D/E is 1.2000. Illustrative arithmetic, not a cost of equity or advice.
Equity beta
1.20, held still, tax 25 percent.
In short
- Drag the bar right for a more borrowed sheet and a lower asset beta.
- Drag it left to zero D/E, where asset beta equals the 1.2 you started with.
- Watch the Hamada factor, 1 plus after-tax D/E, climb with the mix.
- Focus the handle and use the arrow keys to step D/E.
Strip the financing out
How unlevered beta works is the identity. The unlevered beta calculator is the table. Unlevered against levered beta is the pair. Beta here is the equity number you type.
Relever at the target mix
If you are putting this into WACC for a different capital structure, relever at the target D/E, not at the current one. That is the whole point of unlevering first. Unlevered beta is the operations number.
Debt beta is taken as zero
Hamada on a teaching sheet assumes lenders bear no market risk. Distressed debt is a worse fit.
Common questions
Why does asset beta fall as D/E rises?
Because the same 1.2 of equity beta is being attributed to a more borrowed sheet. More of it was financing.
What happens at D/E of zero?
Unlevering is a no-op. Asset beta equals equity beta.
Is this a cost of equity?
No. It is Hamada unlevering on a teaching sheet. It is educational material, not advice.
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.