Asset Beta Formula Example
Asset beta shows the market risk of an industry. It is quite
different from equity beta which is representing both market and financial
risk. Asset beta formula is given below
βa
= [Ve/Ve + Vd (1-t)] x βe
Ve=
Value of Equity
Vd=
Value of Debt
βe = equity Beta
Example
ABC & Company has an equity Beta of 1.5
and want to launch a new project. Corporate
tax rate in industry is 40%. Equity and debt ratio is 3:2 Calculate asset beta for
the company.
Solution
βa
= [Ve/Ve + Vd (1-t)] x βe
=
[3/3+2(1-40%)] x1.5
=
[3/3+1.2] x 1.5
=
[3/4.2] x 1.5
=1.07
