Valuation · 2026-07-13 · 8 min read

Written and reviewed by Project Financial Advisor · FCA · CGMA · ACMA — Chartered Accountant

Levered vs Unlevered Beta: Unlever and Relever (Hamada)

Beta measures how much a stock moves relative to the market, and it sits at the heart of the CAPM cost of equity inside every WACC. But the beta you can look up is a levered beta — it reflects that company's debt as well as its business risk. To build a defensible discount rate for a private or differently-financed company, you have to strip the debt out of comparable betas and then add your own back. That is un-levering and re-levering, and it is one of the clearest markers of a practitioner-built model.

Why a raw beta is not enough

Two companies can run identical operations yet report very different betas simply because one carries more debt. Debt magnifies the volatility of equity returns, so leverage inflates beta without changing the underlying business at all. If you borrow a peer's levered beta and apply it to a company with a different debt load, you import their capital structure by accident — and your cost of equity, WACC and valuation are all wrong from the first cell.

The Hamada formula

The (1 − t) term appears because interest is tax-deductible: the tax shield absorbs part of the risk that debt adds, so leverage raises beta by slightly less than the raw D/E ratio would suggest. Un-levering and re-levering are simply the same equation rearranged.

Step 1 — Unlever each comparable's beta

Take each peer's observed levered beta, its debt-to-equity ratio and its tax rate, and back out the asset beta. What you are left with is that peer's pure business risk, stripped of how it happens to be financed — which is finally comparable across the set.

Notice how the levered betas range widely (1.10 to 1.60) while the unlevered betas cluster tightly around 1.00. That convergence is the whole point: once leverage is removed, these genuinely are the same business risk — and the scatter in the raw betas was mostly financing, not operations.

Step 2 — Relever to your capital structure

Take the median unlevered beta (1.00) and re-lever it using your company's target debt-to-equity ratio and tax rate. Use the target structure, not today's snapshot, because a DCF values the business over the long run. At a 0.50 D/E and 25% tax: βL = 1.00 × [1 + 0.75 × 0.50] = 1.375, or roughly 1.38.

Step 3 — Feed it into CAPM and WACC

With a relevered beta of 1.38, a 4.0% risk-free rate and a 5.5% equity risk premium, the cost of equity is Ke = 4.0% + 1.38 × 5.5% = 11.6%. That figure now reflects your peers' business risk carried at your capital structure — which is exactly what a defensible WACC requires, and exactly what a looked-up beta cannot give you.

Common mistakes

The recurring errors: using a peer's levered beta directly; un-levering with a market-value D/E but re-levering with a book-value one (be consistent); using today's leverage instead of the target; and ignoring tax entirely, which overstates the leverage effect. Each is small on its own and compounds through the discount rate into every year of the valuation.

Build the WACC properly

EasyFinancialModels lets you enter WACC directly or build it through CAPM — risk-free rate, beta and equity risk premium, blended with the after-tax cost of debt at your capital-structure weights — with every component visible as a live Excel formula. Build a DCF valuation model free for up to 3 years and put your relevered beta straight to work.

The Hamada formula, named and used

The unlever-and-relever equations have a name worth knowing: the Hamada formula. Levered beta = unlevered beta × [1 + (1 − tax rate) × debt/equity], and its inverse strips leverage out. It rests on two simplifying assumptions — the debt itself carries no beta, and the tax shield is as safe as the debt — which hold acceptably at moderate leverage and degrade at high leverage, where practitioners switch to versions that give debt its own beta. For the D/E ratios most operating businesses run, Hamada is the standard tool.

A worked unlever-and-relever, three peers to one target

Each peer's levered beta divides by [1 + 0.75 × D/E] to isolate business risk; the three unlevered betas cluster near 0.93, which is the reassurance the method offers — the same underlying business shows the same asset beta once financing is stripped away. Relevering at the target's own 0.40 debt-to-equity gives 0.93 × 1.30 = 1.20, and that is the beta that belongs in the CAPM. Feeding a raw peer average of 1.28 into the cost of equity instead would overstate the discount rate by nearly a point — a material valuation error from one skipped step.

Typical levered beta by industry

### Beta's cousins: levered cash flow and the LBO

The word levered does the same job everywhere in finance: it marks a number measured after debt has taken its share. Levered beta is equity risk after leverage amplifies it; levered free cash flow is the cash left for shareholders after debt service — the walk from EBITDA runs through taxes, working capital and CAPEX to unlevered FCF, then through interest and principal. And a leveraged buyout is the strategy built on maximising that amplification deliberately. The concepts connect: the more debt in the structure, the higher the levered beta, the higher the cost of equity — and the richer the equity returns if the plan works. That symmetry is the whole story of leverage.

Related: how WACC and CAPM set your discount rate · CAPM calculator

Frequently asked questions

What is the difference between levered and unlevered beta?

Levered (equity) beta reflects both business and financial risk from debt. Unlevered (asset) beta strips out leverage to show pure business risk, allowing comparison across differently financed firms.

What is the unlevering formula?

Unlevered beta = Levered beta ÷ [1 + (1 − tax) × Debt/Equity]. Relevering applies the target's own structure: Levered beta = Unlevered × [1 + (1 − tax) × D/E].

Why unlever and relever beta?

To estimate a company's beta from listed peers with different leverage: unlever each peer's beta, average them for business risk, then relever at your subject company's capital structure.

What is the Hamada formula?

The named equation behind unlevering and relevering: levered beta = unlevered beta × [1 + (1 − tax rate) × debt/equity]. It assumes the debt itself carries no beta and the tax shield is riskless — simplifications that hold well enough at moderate leverage.

What is a typical levered beta by industry?

Indicative long-run ranges: utilities 0.4–0.7, consumer staples 0.6–0.8, healthcare providers 0.8–1.0, industrials 1.0–1.2, software 1.1–1.4, semiconductors and cyclicals 1.3–1.7. Always compute from current listed peers rather than relying on a table — leverage and business mix shift the numbers.

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About the author

Every model is built and reviewed by the project's Financial Advisor — a Fellow Chartered Accountant (FCA) of the Institute of Chartered Accountants of Pakistan (ICAP), Chartered Global Management Accountant (CGMA) and Associate Chartered Management Accountant (ACMA) with around two decades of corporate finance, audit and accounting experience, designing investor-grade financial models across industries. Full credentials and background are available on LinkedIn. More about the author →

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