Levered and unlevered Beta

Pablo Fernandez

No D/488, IESE Research Papers from IESE Business School

Abstract: We prove that in a world without leverage cost the relationship between the levered beta ( L) and the unlevered beta ( u) is the No-costs-of-leverage formula: L = u + ( u - d) D (1 - T) / E. We also analyze 6 alternative valuation theories proposed in the literature to estimate the relationship between the levered beta and the unlevered beta (Harris and Pringle (1985), Modigliani and Miller (1963), Damodaran (1994), Myers (1974), Miles and Ezzell (1980), and practitioners) and prove that all provide inconsistent results.

Keywords: unleveredbeta; levered beta; asset beta; value of tax shields; required return to equity; leverage cost (search for similar items in EconPapers)
JEL-codes: G12 G31 M21 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2003-01-25
New Economics Papers: this item is included in nep-cfn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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