when to use these formulas to lever/unlever

[erwar]

Hello guys,
I am confused about when to use the following equations to lever/unlever betas.
In the CFAI problems, they use the following:
Bequity: [1/1+[(1-t)D/E]]
and in other exercises they use
Bequity: [1+[(1-t)D/E]]
In what cases shopuld I use each equation?
thanks a lot!
E.

 

[dwheats]

If you are taking a beta from a comparable company, you UNLEVER it first.
You then LEVER it when you apply it to the capital structure of the company of interset.

 

[S2000magician]

You’re getting your formulae confused. The first should be:
βasset = βequity[1/[1+[(1-t)D/E]]]
This is the formula for the asset beta for a pure-play company, where:

• βequity is the pure-play company’s (equity) beta
• t is their (marginal) tax rate
• D/E is their debt-to-equity ratio

The second should be:
βequity = βasset[1+[(1-t)D/E]]
This is the formula for the (equity) beta for your company, where:

• βasset is your asset beta, which you assume is the same as the pure-play company’s asset beta
• t is your (marginal) tax rate
• D/E is your debt-to-equity ratio

 

[erwar]

you´re totally right. thanks a lot for your help!!
E.

 

[S2000magician]

erwar wrote:you´re totally right.

Sometimes that happens; it’s nearly always an accident.

erwar wrote:thanks a lot for your help!!

My pleasure.