There are two types of beta
Beta is
basically is a value that explain the level of risk for a company.
Equity Beta: it included both business risk and
financial risk. Financial risk is associated to gearing of the company
therefore Equity beta of each company is different from other company due to
incorporation financial risk. Equity Beta changes in accordance with the
gearing of the company. High level geared company has high financial risk (Risk
of default) and therefore equity beta for high geared company is greater than
lower geared company.
Asset Beta: Asset beta explains the business
risk. It is related to industry and same for all companies. Asset beta can be
calculated by the following formula
Asset Beta
=[ (Ve/(Ve+ Vdt (1-t)]x Be +[ (Vd/(Ve+ Vdt (1-t)]x Bd]
Ve= Value of equity
Vd = Value of Debt
Be= Equity Beta
Bd = Equity Beta
Debt Beta: Debt beta explains the risk
associated suffered by the debt holder. Debt beta normally has very low value
because of the following factor
1. Debt has low risk due to charge on
capital
2. Debt are normally have low proportion
to the equity
3. Debt are tax deductible
