What is the significance of Levered & Unlevered Beta? Is it used in placed of regression beta while calculating Ke (Cost of Equity) ?

Question

anonymous · Answer

levered beta is the risk of the firm' equity, while unlevered beta is the overall risk of the firm.

anonymous · Answer

The levered beta reflects two things: first of all the systematic risk associated with the firm in comparison to the market portfolio. Secondly, it represents also the financial risk applied to the equity when a firm uses debt financing. When a firm has debt, the creditors have a fixed claim on the cash flow in terms of interest payments. These interests has to be met before the owners of the firm get their share. So all in all, the unlevered beta is the systematic risk of the firm, whereas the levered beta in addition also takes into account the financial risk to the equity.

Hope that makes it clear :)

anonymous · Answer

Thanks a Lot, Runningmann & Hoel.....