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Levered and unlevered Beta

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  • Fernandez, Pablo

    (IESE Business School)

Abstract

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.

Suggested Citation

  • Fernandez, Pablo, 2003. "Levered and unlevered Beta," IESE Research Papers D/488, IESE Business School.
    • Handle: RePEc:ebg:iesewp:d-0488
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    References listed on IDEAS

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    1. Miles, James A & Ezzell, John R, 1985. "Reformulating Tax Shield Valuation: A Note," Journal of Finance, American Finance Association, vol. 40(5), pages 1485-1492, December.
    2. Hamada, Robert S, 1972. "The Effect of the Firm's Capital Structure on the Systematic Risk of Common Stocks," Journal of Finance, American Finance Association, vol. 27(2), pages 435-452, May.
    3. Robert A. Taggart & Jr., 1991. "Consistent valuation and Cost of Capital Expressions With Corporate and Personal Taxes," Financial Management, Financial Management Association, vol. 20(3), Fall.
    4. Myers, Stewart C, 1974. "Interactions of Corporate Financing and Investment Decisions-Implications for Capital Budgeting," Journal of Finance, American Finance Association, vol. 29(1), pages 1-25, March.
    5. Kaplan, Steven N & Ruback, Richard S, 1995. "The Valuation of Cash Flow Forecasts: An Empirical Analysis," Journal of Finance, American Finance Association, vol. 50(4), pages 1059-1093, September.
    6. Fernandez, Pablo, 2004. "The value of tax shields is NOT equal to the present value of tax shields," Journal of Financial Economics, Elsevier, vol. 73(1), pages 145-165, July.
    7. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-275, May.
    8. Miles, James A. & Ezzell, John R., 1980. "The Weighted Average Cost of Capital, Perfect Capital Markets, and Project Life: A Clarification," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(3), pages 719-730, September.
    9. Lewellen, Wilbur G. & Emery, Douglas R., 1986. "Corporate Debt Management and the Value of the Firm," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(4), pages 415-426, December.
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    Citations

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    Cited by:

    1. Dirk Beyer, 2018. "A matrix approach to valuation and performance measurement based on accounting information considering different financing policies," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 29(1), pages 37-61, March.
    2. Kim-Duc NGUYEN & Sinh HAY & Ngoc-Thuy-Duong HUYNH & Cong-Nguyen-Bao TO, 2018. "The Suitability of Proxy Levered Beta in Business Valuation: Evidence from Vietnam," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 8(2), pages 248-268, February.
    3. el Alaoui, AbdelKader & Masih, Mansur & Bacha, Obiyathulla & Asutay, Mehmet, 2014. "Leverage, Sensitivity to Market Risk and Contagion: A Multi-Country Analysis for Shari’ah(Islamic) Stock Screening," MPRA Paper 57685, University Library of Munich, Germany.

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    More about this item

    Keywords

    unleveredbeta; levered beta; asset beta; value of tax shields; required return to equity; leverage cost;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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