Q:

How Do You Calculate a Levered Beta?

A:

To calculate a levered beta, you will need to determine the stock's and market's returns, plot the stock's returns against the market's returns and calculate the slope of the regression. Beta measures the volatility of a stock's returns relative to the equity returns of the overall market, according to Macabacus. Companies use betas to estimate and compare the cost of equity to other similar businesses.

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1. Determine the stock's and market's returns

Determine the stock's returns at discrete intervals over a period of time. Next, determine the overall market's returns at discrete intervals over the same period of time.

2. Plot the stock's returns against the market's returns

Plot the stock's returns on the y-axis against the overall market's returns on the x-axis. Draw a straight line through the points.

3. Calculate the slope of the regression

The slope of the line can be calculated by taking the interval on the y-axis and dividing it by the interval on the x-axis. This value is the levered beta, also known as the equity beta. If the slope of the line is one, the volatility of the stock is about the same as that of the overall market. If the slope of the line, i.e., the levered beta, is greater than one, the stock's returns are more volatile than the market's returns. The levered beta is used to calculate the cost of equity using the capital asset pricing model.

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