Question of the day
2026-07-04
Why do you unlever and then relever beta when estimating cost of equity for a target?
Answer it out loud first — like you would in the room. Then check yourself:
Reveal the model answer
Model answer
A company's observed (levered/equity) beta embeds the risk of its own capital structure; more leverage raises equity beta. To use comparable companies, you take each comp's levered beta, unlever it to strip out its leverage (giving asset/unlevered beta, which reflects pure business risk), average the unlevered betas, then relever at the TARGET company's capital structure. This isolates business risk and then re-applies the subject firm's specific debt/equity mix.
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