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 (move in the opposite direction from) 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.
Step 1
Get the company's levered beta from Yahoo! Finance. Type the company's ticker symbol in the search box and click the "Key Statistics" link on the left side of the page. The leveraged beta is the beta figure that is displayed on the resulting web page.
Step 2
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.
Step 3
Compute the company's debt-to-equity ratio by dividing total debt by stockholders' equity on the company's balance sheet.
Step 4
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 that you pulled from Yahoo! Finance 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, total debt of $100 and stockholders' equity of $200. The company's unlevered beta is 1.6/[1+(1-0.35)x(100/200)] = 1.2.