This is where you would “relever” the beta using the financing structure of your target company. Covert unlevered beta into levered beta.Find median or average unlevered beta.See conversion formula in sections below. Convert levered betas into unlevered betas.These beta values can be found on sites like Yahoo Finance, MarketWatch, Bloomberg, etc. Gather levered betas for the comparable companies.Steps to Estimate Beta through Comparable Companies: So how does this work? The idea here is that you would take the median or average beta value of a group of similar companies and use that value to estimate the beta of your target company.Īlthough the high level idea seems pretty simple, it actually gets a bit more complicated since each and everyone of those companies in the comparable group will have different financing structures (different amounts of debt, different interest rates, etc). One method is to find a group of comparable or similar companies. In practice, there are several different ways that a financial analyst could estimate a company’s beta. This is why levered beta is used to calculate the cost of equity via the CAPM formula. With this in mind, equity investors naturally feel the impact of debt or “leverage” as a company with high levels of debt will leave less cash flow for equity investors. If unlevered means “without debt”, you can probably guess that levered beta means “with debt.” Levered beta is important because it is notably used in the CAPM formula which is designed to estimate a company’s cost of equity.Įquity investors in a company are paid after debt holders are paid off (interest expense comes before net income).
This characteristic of unlevered beta makes it great for fairly comparing different companies with different financing structures. Unlevered really means “without debt.” So, as you can imagine, unlevered beta represents the beta value of a company before accounting for the impact of debt. In other words, how quickly does this company’s share price move relative to the market (usually represented by the S&P 500).īeta is most notably used in advanced financial models that use formulas like the Capital Asset Pricing Model (CAPM) to generate discount rates applicable to company cash flows.Ĭonsider checking out our Beta article for a broader overview on the metric and the 3 main methods used to calculate a company's Beta. What is Beta?īeta is a figure that measures a company’s volatility relative to the overall market. Maybe I am overseeing something and both are actually the same thing, but an explanation would be appreciated nevertheless.If you need additional guidance on the inputs and correct usage of the calculator, see the below sections covering additional details on unlevered beta.
To me, there are mainly two differences in these calculations which I don't understand: 1.) Why do you start from EBIT in the DCF model but from EBITDA in the LBO model? 2.) Why do you restate the taxes in the DCF model by taking them from EBITA and in the LBO model you take them from the taxable income (= PBT + non-tax deductible interest expense)? Unfortunately I couldn't find an explanation for this and thus wanted to ask whether anyone can explain to me why different calculations are being used.įCF calculation for DCF model: EBIT + Amortization of non-deductible goodwill = EBITA - Taxes on EBITA + D&A + Changes in deferred taxes - Capex - Increase in NWC = Unlevered FCFįCF calculation for lbo model: EBITDA - Net Interest expense - Income taxes (taken from taxable PBT) - Capex - Increase in NWC = FCF While reviewing the FCF definitions in DCF and lbo models, I noticed that they are slightly differently calculated.
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