08 Jun 2015
Beta (β) for an Unlisted Company

by veristrat

Valuation practices and guidelines aimed at valuation of unlisted or private companies provide some leverage into estimation of variables to be used in the process. One such grey area is calculation and use of Levered and Unlevered beta.

Levered beta is the beta that contains the effect of capital structure.

beta

Unlevered beta is the beta after removing the effects of capital structure.

Beta as we know is the measure of variability of a company’s stock price in relation to the overall stock market. However, in case of private companies the beta does not exist. Private companies or unlisted companies do not have historical prices for its shares.

In order to calculate the appropriate beta for an unlisted company the easiest way is to take the mean or median beta of the industry and unlever the beta. Though this is widely accepted and not incorrect, however, the better practice should be to select only a set of 10 – 12 comparable companies on the basis of size, risk, profitability and other comparable criteria’s and take their mean or median beta. When we take the mean or median beta of the industry the result is somewhat smoothed.

Selecting the right set of comparable companies is the first step in calculating the appropriate beta; the debt in the capital structure makes a company more risky and increases the risk of bankruptcy. Secondly, the capital structure i.e. the debt equity ratio of our subject company may not be same as that of our comparable companies. Therefore, we must remove the effect of debt from the comps beta for each of our comps (unlever the beta).

rule

The company specific risk of our subject company that arises due to debt in the capital structure should now be taken into account by re-levering the unlevered beta of the comparables using the debt equity ratio of our subject company.

rule2

The above exercise may seem to be time consuming but as it is said that it’s the analyst job to select the correct data, the model by itself will not correct the data. Stay tuned for more update on valuation concepts.

See at LinkedIn…
https://www.slideshare.net/slideshow/embed_code/49122321


  • Williamkt

    I think this is a real great forum post.Much thanks again. Sciola

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