How do you calculate Beta?

If you have a public company, you can easily find their Beta online. For private companies, you need to look at their comparable companies. Once you’ve identified Beta for all comparable companies, you must un-lever each Beta and take the median.

Wait, un-lever Beta? What does that mean? When you look up a Beta of a company online, it’s naturally levered as it takes into account the capital structure of the company. But, the capital structure of the company we’re analyzing is going to be different than its comparable companies, meaning it won’t tell us much unless we remove the capital structure. Since we’re analyzing a company with a different capital structure than the comparables, we must create a set of Betas that are reflective of how risky a company is, regardless of what percentage of debt or equity it has.

In order to un-lever Beta, we use the below formula using each company’s unique capital structure:

Un-Levered Beta = Levered Beta / (1 + ((1 - Tax Rate) x (Total Debt / Equity)))

Once you have successfully Un-Levered Beta, you can take the median of the set and re-lever it using our company’s capital structure in the below formula:

Levered Beta = Un-Levered Beta x (1 + ((1 - Tax Rate) x (Total Debt / Equity)))

Voila. You have calculated Beta.

Both the formulas and rationale for un-levering and re-levering will be technical questions you face.