Unlevered beta

Unlevered beta is a firm's equity beta stripped of financial leverage, reflecting only operating risk. It is derived from the observed equity beta and re-levered when estimating the cost of equity at a different target capital structure.

ByHoang TruongUpdated July 3, 2026

FrameworkCAPM

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A firm with an equity beta of 1.40, a debt-to-equity ratio of 0.5 and a 25% tax rate has an unlevered beta of 1.40 ÷ [1 + 0.75 × 0.5] = 1.40 ÷ 1.375 ≈ 1.02. This isolates the operating risk, which can then be re-levered at any target capital structure.

Where it fits

TopicRisk, Return & the CAPMAdvancedSubjectCorporate FinanceAdvancedTopicCapital Structure & LeverageAdvanced

The formula

LaTeX

\beta_u = \frac{\beta_e}{1 + (1-t) \times \frac{D}{E}}

Variables

$β_{u}$: unlevered (asset) beta: systematic operating risk independent of capital structure
$β_{e}$: observed equity beta: combines operating and financial risk
$t$: corporate tax rate (decimal)
$D / E$: ratio of market value of debt to market value of equity

The Hamada formula. Strips the financial-risk amplification from the equity beta to isolate business risk. Industry unlevered betas can be averaged across comparable firms and then re-levered at any target capital structure.

LaTeX

\beta_e = \beta_u \times \left(1 + (1-t) \times \frac{D}{E}\right)

Variables

$β_{e}$: re-levered equity beta at the target capital structure
$β_{u}$: unlevered (asset) beta obtained from comparable-company analysis
$t$: corporate tax rate (decimal)
$D / E$: target ratio of market value of debt to market value of equity

Used to estimate the equity beta — and hence the CAPM cost of equity — at any desired leverage ratio. Increasing D/E raises β_e, raising the required return on equity.