Contents

INTRODUCTION: ...................................................................................................................................... 2 HOW TO CALCULATE LEVERED BETA: ....................................................................................................... 2 STEPS T O CALCULATE: ............................................................................................................................. 3 HOW TO CALCULATE UNLEVERED BETA: .................................................................................................. 3 STEPS TO CALCULATE:.............................................................................................................................. 3 BETA CONCEPT: ....................................................................................................................................... 4 LEVERED COMPANY: ................................................................................................................................ 4 UNLEVERED COMPANY: ........................................................................................................................... 7 BETAS OF LEVERED AND UNLEVERED BY SECTOR: .................................................................................... 7 CONCLUSION: ........................................................................................................................................ 12

INTRODUCTION:
Unlevered Beta: A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta of a company without any debt. Unlevering a beta removes the financial effects from leverage. The formula to calculate a company's unlevered beta is:

Where: BL is the firm's beta with leverage. Tc is the corporate tax rate. D/E is the company's debt/equity ratio. Levered Beta: Levered beta is the beta that reflects a capital structure that does include debt. The term often refers to firms that have a large percentage of debt relative to equity when compared against peers in the same industry. Many financiers believe that the optimum capital structure requires some level of borrowing, though the exact percentage will vary depending on the industry and management's preferences. However, companies that do not have debts on their balance sheets tend to survive better in a recession. . .

HOW TO CALCULATE LEVERED BETA:

Robert Hamada combined the capital asset pricing model and the Modigliani and Miller capital structure theories to create the Hamada equation. There are two types of risk for a firm financial and business. The business risk relates to the unlevered beta for the firm; the financial risk refers to the levered beta. An unlevered beta assumes zero debt. The Hamada equation illustrates that when a firm increases its debt, the financial leverage also increases the firm's risk and, in turn, its beta. Levered beta can be calculated based on the unlevered beta, tax rate, and debt-to-equity ratio.

STEPS T O CALCULATE:
1.

Gather the following information about the company - Unlevered beta, tax rate and the debt-to-equity ratio. The tax rate varies, based on the location and size of the firm. You must estimate the tax rate.

2.

Multiply the debt-to-equity ratio by 1 minus the tax rate, and add 1 to this amount. For example, with a tax rate of 26.2 percent, a debt-to-equity ratio of 1.54 and a beta of 0.74, the resulting value is 2.13652 (1.54 times (1-.40))+1).

3.

Multiply the amount in Step 3 by the unlevered beta to get the levered beta. In the example above, the levered beta would be 1.58 (2.13652 times 0.74).

HOW TO CALCULATE UNLEVERED BETA:

A company's beta is a numerical measure of how closely correlated a company's shares are to the stock market as a whole. A beta of zero means there is no correlation between the company's stock and the market; a positive beta means that the company's shares move in the same direction as the market; and a negative beta means that the company's shares are inversely correlated to the market. An unlevered beta compares the movement in the shares of a company without debt to the movement of the market. By removing the effects of debt, an unlevered beta measures the riskiness of the company's underlying operations. For this reason, unlevered beta is a popular measure of systemic risk, and it is widely used by investors and corporate managers.

STEPS TO CALCULATE:
y y Get the company's levered beta. Determine the company's corporate tax rate by dividing the company's tax expense by its pre-tax income on the income statement. To be conservative, you should use the company's average tax rate over the past three years. y Compute the company's debt-to-equity ratio by dividing total debt by stockholders' equity on the company's balance sheet. y Calculate the company's unlevered beta according to the following formula: Bl / [1+ (1-Tc) x (D/E)].

In this formula, Bl is the levered beta, in Step 1; Tc is the average corporate tax rate that you computed in Step 2; and D/E is the debt-to-equity ratio you calculated in Step 3. As an example, suppose that a company has a levered beta of 1.6, an average corporate tax rate of 35 percent and total debt of $100 and stockholders' equity of $200. The company's unlevered beta would be 1.6 / [1+ (1-0.35) x (100/200)] = 1.2.s

BETA CONCEPT:
In finance, the beta of a stock or portfolio is a number describing the relation of its returns with that of the financial market as a whole. The beta coefficient is a key parameter in the capital asset pricing model (CAPM). It measures the part of the asset's statistical variance that cannot be mitigated by the diversification provided by the portfolio of many risky assets, because of the correlation of its returns with the returns of the other assets that are in the portfolio. Beta can be estimated for individual companies using regression analysis against a stock market index such as, S&P 500 & so on. It is non-diversifiable risk, its systematic risk, or market risk. Beta is also referred to as financial elasticity or correlated relative volatility, and can be referred to as a measure of the sensitivity of the asset's returns to market returns. Measuring beta can give clues to volatility and liquidity in the market place.

LEVERED COMPANY:
A levered company is a company that uses any debt to help finance its operations. Most companies are leveraged to some degree, but others take on so much debt they have difficulty servicing it and may file for bankruptcy. Highly leveraged companies often have more volatile profits than other companies. Some analysts, however, dispute the idea that leverage affects a company's performance in any way. In finance, leverage is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and

using derivatives. Important examples are:

A public corporation may leverage its equity by borrowing money. The more it borrows the less equity capital it needs, so any profits or losses are shared among a smaller base and are proportionately larger as a result.

A business entity can leverage its revenue by buying fixed assets. This will increase the proportion of fixed, as opposed to variable, costs, meaning that a change in revenue will result in a larger change in operating income.

Hedge funds often leverage their assets by using derivatives. Levered equity means equity in a company that also uses debt financing. Unlevered equity is

equity financing for an all-equity firm. If you thought that Intel should be more levered, you could buy shares in Intel partially using your own cash and borrow the amount of money representing the amount of leverage you believe Intel should have for the percentage of the company that you own to buy additional shares in Intel. You will have used leverage to create a riskier portfolio than owning Intel alone. A highly leveraged company has most of its capitalization from long and short term debt, not in share underwriting. With a highly leveraged company, the assets and operations may suffer from outside influences such as a takeover, or greenmail. To shield against this the long term debt may be traded for tax-differed or exempt bonds, issued by the government; this is often done in specific industries to promote growth in those areas. A company that uses borrowed money to help finance its assets. Leveraged companies often have more volatile earnings than firms that rely solely on equity financing. This volatility is offset, however, by the possibility of a higher return to stockholders if the firm is able to earn more on its assets than the cost of the money used to finance those assets. In finance, leverage is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are:


A public corporation may leverage its equity by borrowing money. The more it borrows the less equity capital it needs, so any profits or losses are shared among a smaller base and are proportionately larger as a result.

A business entity can leverage its revenue by buying fixed assets. This will increase the proportion of fixed, as opposed to variable, costs, meaning that a change in revenue will result in a larger change in operating income.

Hedge funds often leverage their assets by using derivatives. Levered equity means equity in a company that also uses debt financing. Unlevered equity is

equity financing for an all-equity firm. If you thought that Intel should be more levered, you could buy shares in Intel partially using your own cash and borrow the amount of money representing the amount of leverage you believe Intel should have for the percentage of the company that you own to buy additional shares in Intel. You will have used leverage to create a riskier portfolio than owning Intel alone. A highly leveraged company has most of its capitalization from long and short term debt, not in share underwriting. With a highly leveraged company, the assets and operations may suffer from outside influences such as a takeover, or greenmail. To shield against this the long term debt may be traded for tax-differed or exempt bonds, issued by the government; this is often done in specific industries to promote growth in those areas. A company that uses borrowed money to help finance its assets. Leveraged companies often have more volatile earnings than firms that rely solely on equity financing. This volatility is offset, however, by the possibility of a higher return to stockholders if the firm is able to earn more on its assets than the cost of the money used to finance those assets. y The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. y The amount of debt used to finance a firm's assets. A firm with significantly more debt than equity is considered to be highly leveraged. y Leverage is most commonly used in real estate transactions through the use of mortgages to purchase a home. EG : Enron & Satyam

UNLEVERED COMPANY:
An unlevered company is a company which has no debt. EG: Infosys

BETAS OF LEVERED AND UNLEVERED BY SECTOR:

The table shows industry average betas, levered and unlevered for US COMPANIES. Please refer to the section: Variable Definition for further explanations. Number of Firms 35 67 46 65 25 60 499 7 5 38 22 17 90 49 21 Average Beta 1,23 0,80 1,34 0,76 1,08 1,06 0,53 0,77 1,36 0,71 0,58 0,41 1,30 0,74 1,75 Market D/E Ratio 21,59% 30,29% 48,95% 18,34% 189,97% 42,53% 22,04% 12,74% 7,99% 25,61% 20,17% 15,50% 4,01% 27,72% 53,34% Unlevered Beta 1,03 0,64 0,97 0,67 0,44 0,80 0,45 0,71 1,27 0,60 0,50 0,37 1,25 0,61 1,15

Industry Name Advertising Aerospace/Defense Air Transport Apparel Auto & Truck Auto Parts Bank Bank (Canadian) Bank (Foreign) Bank (Midwest) Beverage (Alcoholic) Beverage (Soft Drink) Biotechnology Building Materials Cable TV

Canadian Energy Cement & Aggregates Chemical (Basic) Chemical (Diversified) Chemical (Specialty) Coal Computer Software/Svcs Computers/Peripherals Diversified Co. Drug E-Commerce Educational Services Electric Util. (Central) Electric Utility (East) Electric Utility (West) Electrical Equipment Electronics Entertainment Entertainment Tech Environmental Financial Svcs. (Div.) Food Processing Food Wholesalers

11 13 16 31 92 11

0,62 0,78 0,91 0,79 0,79 0,76

17,66% 18,46% 29,19% 16,85% 23,32% 17,63%

0,56 0,69 0,73 0,70 0,66 0,66

389 143 117 305 52 38 25 31 16 93 179 88 31 85 233 104 20

1,90 2,06 0,75 1,30 3,07 1,10 0,76 0,72 0,79 1,40 1,45 1,40 1,87 0,69 0,78 0,58 0,63

3,40% 8,06% 26,67% 7,92% 6,55% 2,29% 91,24% 81,86% 82,23% 64,93% 16,26% 23,60% 5,51% 54,85% 57,41% 22,03% 20,06%

1,85 1,92 0,62 1,21 2,89 1,08 0,46 0,45 0,50 0,89 1,27 1,17 1,78 0,46 0,53 0,50 0,54

Foreign Electronics Foreign Telecom. Furn/Home Furnishings Grocery Healthcare Information Home Appliance Homebuilding Hotel/Gaming Household Products Human Resources Industrial Services Information Services Insurance (Life) Insurance (Prop/Cas.) Internet Investment Co. Investment Co.(Foreign) Machinery Manuf. Housing/RV Maritime Medical Services Medical Supplies Metal Fabricating

12 21 38 23 32 16 34 77 30 28 200 33 43 78 297 21 17 133 19 28 195 262 38

1,12 1,76 0,82 0,78 1,06 0,76 0,85 0,74 0,74 1,14 0,85 0,94 0,75 0,67 2,63 0,64 1,08 0,77 1,00 0,67 0,82 0,85 0,80

18,37% 19,86% 15,87% 58,05% 14,62% 21,09% 46,03% 43,13% 13,50% 8,90% 23,33% 8,77% 7,92% 3,95% 2,23% 28,60% 0,00% 36,08% 16,67% 61,87% 18,18% 5,93% 12,10%

0,99 1,51 0,74 0,55 0,94 0,65 0,64 0,54 0,67 1,07 0,71 0,87 0,70 0,65 2,57 0,50 1,08 0,60 0,88 0,44 0,72 0,81 0,74

Metals & Mining (Div.) Natural Gas (Distrib.) Natural Gas (Div.) Newspaper Office Equip/Supplies Oilfield Svcs/Equip. Packaging & Container Paper/Forest Products Petroleum (Integrated) Petroleum (Producing) Pharmacy Services Power Precious Metals Precision Instrument Publishing R.E.I.T. Railroad Recreation Restaurant Retail (Special Lines) Retail Building Supply Retail Store Securities Brokerage Semiconductor

76 30 38 20 28 93 35 39 34 145 14 24 61 104 43 135 18 78 84 175 14 9 49 26

0,99 0,65 0,84 0,84 0,94 0,98 0,80 0,86 0,85 0,62 0,78 1,56 0,41 1,52 0,74 0,63 0,67 0,93 0,69 1,01 0,90 0,88 0,97 1,32

18,39% 76,59% 54,76% 16,32% 31,74% 20,24% 63,85% 65,81% 14,01% 19,38% 7,59% 44,36% 7,80% 10,12% 20,09% 4,19% 42,63% 18,97% 15,41% 8,98% 36,97% 3,92% 16,75% 83,86%

0,85 0,42 0,58 0,74 0,77 0,84 0,53 0,55 0,77 0,54 0,74 1,11 0,38 1,40 0,64 0,61 0,53 0,81 0,61 0,95 0,73 0,86 0,87 0,80

Semiconductor Equip Shoe Steel (General) Steel (Integrated) Telecom. Equipment Telecom. Services Thrift Tire & Rubber Tobacco Toiletries/Cosmetics Trucking Utility (Foreign) Water Utility Wireless Networking Grand Total

124 16 24 14 120 137 222 14 13 23 36 6 17 66 7091

2,64 2,51 0,98 1,26 2,26 1,32 0,48 1,02 0,59 0,72 0,78 0,85 0,60 2,38 1,00

6,18% 8,32% 4,90% 27,05% 3,40% 27,61% 10,51% 75,25% 25,13% 12,01% 33,47% 57,48% 59,84% 22,92% 26,93%

2,50 2,33 0,94 1,03 2,20 1,06 0,45 0,63 0,50 0,66 0,64 0,58 0,43 1,96 0,81

CONCLUSION:
Beta helps us to measure the volatility of the companys market share. For an individual when he wants to investment in any company, Beta helps him to take the right decision. Levered company is a company which has financial debt and unlevered company is a company in which unloading of financial debt takes place. Beta is used as a measure to rate the companies in Bombay Stock Exchange (BSE) & National Stock Exchange (NSE). If beta = 1 it states that the companies share goes hand in hand with the market share.