How do I calculate equity beta?

Question

Trying to determine the equity beta (β) of a privately held company, Summa Corporation, that is not required to publish its financial information. The average asset beta from a group of comparable companies is

1.28. If Summa Corp has a debt/equity ratio of 30% and the tax rate is 35% what is its equity beta (β)?

Answer 1

Unlevered Beta = Average Asset Beta / { 1+(1-Tax rate) x Debt/Equity ratio }

Unlevered Beta = 1.28/ {1+(1-0.35)x0.3}

= 1.07

In the final step, we need to re-lever the equity using the target debt-to-equity ratio of the private company, which is 0.3

Hence, Levered Beta = Unlevered Beta x { 1+(1-tax rate)x Debt/Equity}

= 1.07x {1+(1-0.35)x0.3}

= 1.28 is therefore equity Beta