Equity beta, asset beta and financial leverage

It can be observed that higher financial leverage increases equity beta. However, the relationship between the unleveraged asset or enterprise beta (the beta of the underlying operating business), and leveraged equity beta that is commonly applied in practice, is incomplete.

We explain the relevance of asset betas in equity valuation and why it is important to analyse the beta of debt finance and the value, and riskiness, of the debt interest tax shield when delevering and relevering equity beta.

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Calculating and analysing the drivers of Equity Beta

Equity beta is a valid measure of investment risk and an important metric in equity analysis. However, don’t just plug into your models the equity beta given by a data provider – beta should be analysed and adjusted by investors with the same diligence that is applied to performance metrics.

We present an interactive equity beta analysis model to assist investors in better understanding the drivers of equity beta and its application in equity valuation. The model features the calculation of beta (and its volatility and correlation components) for any investment for which price data is available in Microsoft Excel.

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