{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

adjust_beta - FINA537 Equity Valuation Professor Laura...

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
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 were unlevered). 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 V L = V U + t D . (2) In this formula, t D
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern