When do I use levered beta versus unlevered beta?
Answers:
In theory, you can't have different betas for different divisions unless every division is a publicly listed company. Beta is the slope coefficient of the listed company's stock regressed against the underlying market to determine how sensitive the company is to general market risk. If the subsidiaries ARE listed or this is a classroom exercise whereby the teacher gives you the beta, then this is easy.
In theory, as you add more and more debt, the more earning variability (i.e. risk) is included in future cash flows. This means that earnings is comprised of two components - business risk and financial risk (e.g. the risk that interest rates rise and your debt become more expensive to pay off). The business is risk the unlevered beta, which you derive through the formula: Bl = Bu * [1 + (1-t) (D/E)]. That is, you back into how much risk via beta is in the core business (assuming no debt). To answer your question directly, you use levered beta to determine FIRM risk and unlevered beta to look at division risk (or if you're trying to look at optimal leverage ratios).
WACC of the company is the summation of the MARKET WEIGHTING of capital.
WACC = W(a)*K(a) + W(b)*K(b) + ... + W(debt)*K(debt)
where W = market weight, a-z = divisions cost of unlevered equity and debt is debt.
Now the Cost of Unlevered Equity is done through CAPM:
K(e) = [Beta(unlevered)(Rm - Rf)]+ Rf
So plug in the numbers and there you go.
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