Unlevering Beta for Informed Investment Decisions
Dr. Torres is excited about the potential of becoming a partner, but he's rightfully cautious about committing such a significant sum. He's concerned about the overall risk profile of the practice, particularly how much of that risk is due to its debt financing versus the inherent business operations. He needs a clear understanding of the practice's operational risk before making his decision.
By using the Unlevered Beta Calculator, we can isolate the practice's operational risk, removing the distortion caused by debt. Inputting the practice's levered beta (estimated at 1.2), a debt-to-equity ratio of 0.8, and a tax rate of 25%, we calculated an unlevered beta of approximately 0.75. This shows the business operations are less volatile than originally perceived, giving Dr. Torres more confidence.
The Unlevered Beta Calculator requires levered beta, debt-to-equity ratio, and the corporate tax rate as inputs. The formula removes the effect of debt, providing a clearer picture of the company's inherent business risk.
$150,000 potential return over 10 years due to informed decision making.
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