What it calculates

Unlevering beta strips the effect of a company's debt out of its observed share price volatility, leaving the business risk on its own. You then relever that asset beta at your own capital structure. It is how you borrow a beta from comparable companies without also importing their balance sheets.

How it is calculated

Observed equity beta reflects both business risk and financial risk. The Hamada relationship removes the financing component: asset beta equals equity beta divided by (1 + (1 - tax rate) x debt/equity). To go the other way, multiply the asset beta by that same factor using your own target debt-to-equity ratio.

How to read the result

Asset betas across a peer set should cluster reasonably tightly, because they describe the same underlying industry risk. Wide dispersion is a warning that the peer group is not truly comparable, or that one company's beta is being distorted by illiquid trading. Take the median rather than the mean when relevering, so a single outlier does not drag the result.

Worked example

A comparable trades with an equity beta of 1.45, a debt-to-equity ratio of 0.60 and a 25% tax rate. Asset beta is 1.45 / (1 + 0.75 x 0.60) = 1.00. If your own target debt-to-equity is 0.25, your relevered equity beta is 1.00 x (1 + 0.75 x 0.25) = 1.19.

Common questions

Why does the tax rate appear in the formula?

Because the tax shield on interest makes debt partly a claim on the government rather than purely on the firm. The (1 - tax rate) term scales the leverage effect down to reflect that the debt does not transmit its full risk to equity holders.

Which peers should I use?

Companies exposed to the same demand drivers and cost structure, not merely the same sector label. A regional utility and a merchant power trader share an industry code and almost nothing else. Five to ten genuinely comparable names beat twenty loose ones.

Should the debt beta be assumed to be zero?

The standard formula assumes so, which is reasonable for investment-grade debt. For heavily distressed companies the debt itself carries equity-like risk, and assuming zero will understate the asset beta.