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Pablo Fernandez: IESE Business School, Postal: Research Division, Av Pearson 21, 08034 Barcelona, SPAIN
Abstract: We prove that in a world without leverage cost the relationship between the levered beta ( L) and the unlevered beta ( u) is the No-costs-of-leverage formula: L = u + ( u - d) D (1 - T) / E. We also analyze 6 alternative valuation theories proposed in the literature to estimate the relationship between the levered beta and the unlevered beta (Harris and Pringle (1985), Modigliani and Miller (1963), Damodaran (1994), Myers (1974), Miles and Ezzell (1980), and practitioners) and prove that all provide inconsistent results.
Keywords: unleveredbeta; levered beta; asset beta; value of tax shields; required return to equity; leverage cost
16 pages, January 25, 2003
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