Levered and unlevered Beta

Preprint OPEN
Fernandez, Pablo (2003)
  • Subject: unleveredbeta; levered beta; asset beta; value of tax shields; required return to equity; leverage cost;
    • jel: jel:G12 | jel:G31 | jel:M21

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.
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