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Given the current D/E ratio differs from the target D/E ratio should we adjust the company's
equity beta (1.25) to reflect the target capital structure?
Solution
Yes first unlever the beta using the current capital structure. Finally calculate the levered beta
using the new capital structure.
Unlevered beta = 1.25/(1 + (current debt/equity)*(1-tax rate))
levered beta or adjusted beta = unlevered beta * (1 + (target debt/equity)*(1-tax rate))

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  • 1. Given the current D/E ratio differs from the target D/E ratio should we adjust the company's equity beta (1.25) to reflect the target capital structure? Solution Yes first unlever the beta using the current capital structure. Finally calculate the levered beta using the new capital structure. Unlevered beta = 1.25/(1 + (current debt/equity)*(1-tax rate)) levered beta or adjusted beta = unlevered beta * (1 + (target debt/equity)*(1-tax rate))