Asset Beta Formula
Asset beta represents the market risk of the industry
and all market (industry) shall suffer this risk. Asset beta may be calculated
by the following formula
βa
= [Ve/Ve + Vd (1-t)] x βe
Ve=
Value of Equity
Vd=
Value of Debt
βe = equity Beta
Asset Beta Formula Example
A
company wants to launch a new project. Company has equity beta of 1.4 & and
Equity to Debt ratio is 6:4. Corporate tax is 20% .Calculate the asset beta of
the industry.
Solution
βa
= [Ve/Ve + Vd (1-t)] x βe
=
[6/6 + 4 (1-20%)] x 1.4
=
[6/6+3.2]x1.4
=[6/9.2]x1.4
=.65x1.4
=.91
