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Unformatted text preview: 1 FINA537 Equity Valuation Professor Laura Xiaolei Liu Notes on Adjusting β for Financial Leverage Often it is necessary to adjust betas for the effects of financial leverage. This note provides the appropriate method for leveraging and unleveraging β . I will use the following notation: V U = Value of the unlevered firm β D = The firm’s debt beta V L = Value of the levered firm β U = The firm’s unlevered or asset beta (i.e., what the firm’s E = Value of the firm’s equity equity β would be if the firm w e r e u n l e v e r e d ) . D = Value of the firm’s debt β L = The firm’s levered beta (i.e., the β of the levered firm including t = The corporate tax rate the interest tax shields). β E = The firm’s equity beta First, recall that the value of the levered firm is equal to the value of its equity plus the value of its debt V L = E + D . (1) Next, note that the value of the levered firm is equal to the value of the unlevered firm plus the value of the interest tax shields...
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