Levered and Unlevered Beta, James Tompkins
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- Опубликовано: 2 июл 2024
- This is an advanced topic and will likely make more sense if you already understand the six "Corporate Finance" series lectures. In this "mini-topic" I explain what I mean by the levered and unlevered beta and then derive a relation between the two. I also develop the formula for the debt tax shield, which is relevant to the levered and unlevered beta derivation.
Incredible explanation, better than every Finance professor or book I've ever encountered. Thank you.
You, Sir, are better than a magician. You are a true teacher.
In 28 minutes, you were able to cohesively and coherently explain corporate tax shields and, more to the point, the idea of Beta(s) as it relates to corporate finance. A class in college is alloted on average 1 hour and 15 minutes in the U.S. My corporate finance professor, for instance, waltzed his way through the subject as if we were an audience watching a magician perform tricks through clandestine methods, simply writing the final formula on the whiteboard and failing to address questions as to why and from where this formula was conceived. An hour and 15 minutes gone to oblivion, practically. But in less than half the time, you were able to present the topic with much needed clarity, preparedness, and assurance. Thank you.
Thank you so much sir for an awesome post. Teachers like you make students lives easier and allow them to gain deep understanding of subject matter. Please keep posting wonderful posts.
Thank you. :)
Thanks James, I found your approach and explanation very useful especially the way you pose the questions and answered it as you went along. Much appreciated.
The way you present the video is wonderful. The pauses are perfect. It's like actually having a dialog with you. Really appreciate it. Would love to see more videos with Corporate Finance topics.
+Akshat Sinha Thank you so much.
Awesome video and very clearly explained sir! You completely demystified the whole concept in a bottom-up, lucid, and step by step manner that flowed effortlessly and cohesively. Much appreciated and thank you again sir!
Thank you Sir, I´ve been looking for an explanation like this for a while, it was perfect. Thank you so much!
RUclips has led me to some incredibly amazing teachers... You sir are one of them. Clear explanation of concept. I'm totally blown away. Asante from Kenya.
This style of explaining is really amazing!
That was so amazing..!! struggling with this concept for many days..!! Thank You..!!
This was fantastic. My professor with his fancy degrees couldn’t explain this to me in 3 hours compared to what u did in half an hour. Many thanks!
Really helpful for my IB interviews down the road
You're an incredible teacher. This was quite awesome. Thank you so much for doing this!
Garfield Thanks!
Great video, thanks James. Helped a lot in my EMBA course.
Thank you so much for uploading these! The pauses are great also-- Helps me think about the answers before you explain why.
Brilliant. An Easy and approachable way of teaching. Thank you.
Thanks. :)
WONDERFUL Teaching skills...Learning Financial concepts couldn't be more easier and interesting..Thank you Sir
+HITESH GARG You are so welcome. :)
Great video shows you how nice and easy things can be explained the right way :D
Hi James. Thank you for your videos. After watching this video I understand the reasoning behind the formula and it all just makes so much more sense. Am going to watch your other videos now - hope you have something on WACC as well. Keep up the good work. You are a great lecturer.
Thanks! And regarding WACC...yes I do...I'd recommend watching "The Discount Rate for the Asset Investment Decision (WACC)" Good luck to you.
Pedagogic talent right here, keep it up!
I feel so lucky to have found your Video! Very helpful and you are so great! Thank you
Thanks! I appreciate your kind comment.
I was studying and could wrap my mind around how my book was explaining it. Very helpful, thank you!
Thank you. I am delighted it was helpful.
Again super helpful. Very noble knowledge sharing :)
Spoorthi Purumala Thanks!
Loved the way you explained the whole concept
Thank You!!! :)
preeti rathod Thanks. :)
Thank you very much for explaining these concepts so clearly.
UCBerkeley Grad Thanks for your kind words and you are so welcome.
Brilliant explanation and presentation sir. Thank you so much.
+Akshit Galati Thanks! You are welcome.
Thanks! Extremely clear and helpful!!!
Great teacher!
Thanks James, extremely clear and helpfull. Cheers
You are welcome.
Thank you for share your knowlege Dr.
Thank you sir. You are a very good teacher.
Excellent job.
Excellent tutorial!
Thank you so much sir. This is very helpful.
its funny how at my university professors couldn't explain this as clear as you did :D
+Bandoolero Thanks!
Thankyou James!!
Thank you for the video! It was very helpful!
+numberphile_01 Great! You are welcome.
great help for CFA!
Amazing explanation
Very helpful ! thanks so much!!!!
really really really helpful
Thanks for the great lecture, sir. I was distracted the first time I watched it though because I couldn't place your accent - it seemed to be a seamless blend of an English, Australian and American accent. Made the lecture all the more interesting!
B Ali You are welcome. Sorry about the accent confusion. I was born in the USA, but at a very young age moved to Europe and grew up in Belgium and England. As an adult I moved back to the US and have since lost a lot of my English accent. So I refer to it as "mid-Atlantic". :)
You're a citizen of the world, sir!
Great video and thank you very much.
Thanks and you are welcome. :)
Beautiful
Amazing! Thank you so much!
+Vinícius Strano Thanks. Glad you liked it.
Thanks a lot!!!
Thanks!!
great job and thank you!
Thank you for your kind words Michael. I appreciate it.
Thanks!
thanks mate - very helpful
You're welcome :)
I like the video since it explains a complex topic in very simple words. However, using the cost of debt as the discount rate for the tax shield is something one could argue. The tax shield is owned by the shareholders, and therefor cost of equity would make more sense. I am curious to learn how the formula reads when this discount rate is being used.
Ivo R. Verdonkschot the cost of debt is the proper discount rate because discount rates are dependent upon the riskyness of the cash flows. Since we are looking at flows from debt rather than flows dependent upon equity, CoD is the proper discount rate and not CoE
very helpful, thanks
Sorry about the late reply but you are very welcome. Delighted it is helpful.
Thanks
you are a star.
Thanks! :)
Thank you. I have some questions. In practice, when you are unlevering a beta, do you use the debt to equity ratio for one period or do you take an average of the period(period here meaning the time for your market and stock returns data points)? Also do you use a corporate tax or an effective tax? If this is not the right forum to ask a question, point me to the right forum.
Samuel N Good questions Samuel. I hate to answer questions on RUclips because robs others of the thought process if I just provide information instead of teach. And teaching entails (for me) a back and forth interaction. I will point you in the right direction though. Please see my valuation of stocks and bonds video for D and E. Also, for the tax rate, it refers to the debt tax shield. Is this shielding from corporate taxes? If it is not clear you may wish to look at my capital structure and taxes video. Good luck.
Can you help me understand what debt beta is exactly? if my understanding is correct, debt beta reflects that correlation between the changes in returns to debt holders of the specific company and changes in the average market debt returns to debt holders. In this case, if debt beta is 0, it just means there is no correlation, not that there is no change in risks of debt repayment. is this right? Thank you!
i highly recommend watching this in 1.25 speed
even 1.5 was good for me, he is really pleasant speaker
He is great, but there is definitely a lot of dead space when he asks rhetorical questions.
Hi Mr. Tompkins - quick question:
When you are talking about the debt tax shield, you used "Rd" (cost of debt) to discount the tax deductions to be received (in the future) at the 6 minute mark. Why is that?
When we discount future cash flows, aren't we assuming we will be receiving those cash in the future, but if we were to receive all of them today, we must discount them by however much we would have earned if we had "invested" those money today?
Wenbo Liu How do we know what's the correct discount rate to use? You mentioned risks - but if I were to receive 3000 dollars in cash in the future (every year), how do I know the risk associated with that? Maybe the tax deductions do not come in the form of cash, but are invested in debt automatically? That's what I'm having a hard time understanding. Thanks for reading this!
Wenbo Liu Hi Wenbo, This is not a good forum for me answer questions because it robs others of the thought process. I will point you in the right direction though. I would suggest watching the corporate finance lecture series playlist on my channel in order. Your second question relates to time value of money and the notion of expected as opposed to guaranteed cash flows and the concept of risk applied to the expected cash flows through a discount rate. Your second question relates to why a specific type of discount rate (rd) is applied to a set of cash flows (taxes saved). This should emerge through watching the lectures on the playlist especially the discount rate for financial securities and the discount rate for the asset investment decision. Good luck.
This shits so good
Thanks Akshat for your kind words. Actually if on the You Tube site you do a search for "Understanding Finance Channel" my channel will pop up. Click the playlist tab and you will see over 40 videos posted in the areas of Corporate Finance and International Finance. The link is ruclips.net/channel/UC4XJHGqb_WCUXQkHvKN5EwA I hope this is helpful.
What are the applications of Levered and Unlevered beta? Where is it generally used?
Thanks Samir.There are a number of applications and if you were in my class you would see I use it in the Darden Boeing 7E7 case for cost of capital, the Deluxe case on capital structure, and if you watch my Mergers and Acquisitions lecture on You Tube you will see an application there in the valuation of private companies.
thank you sir............could you please explain about mergers and acquisition
Hi Uday Kiran, Thank you for your interest in mergers and acquisitions. This is generally something I teach through the case study method and therefore have not designed any power points on this topic. So I am sorry but it will not be available in the near future. I do however appreciate your interest and may at some point be able to post something on this topic.
Hi Uday...if you are still interested...I have posted an M&A lecture....I wish you all the best.
Thank you sir
Hi Sir. Sometimes Beta of levered firm is calculated as Beta of the Unlevered firm*Total Equity+Total Debt/Total Equity. Could you please help me in explaining this formula?
Here's a clue that may help you answer your own question. What does this formula assume is the only benefit of debt? The answer is the debt tax shield or Tc*D. Now assume no taxes (i.e. Tc=0) or no benefit to debt and see how the formula changes . Hope this helps.
Thank You Sir, So if one can get a considerable amount of tax shield out of the Debt employed in the firm. The beta of the levered firm or in other words the financial risk of the shareholders tends to decrease to the extent of the tax benefit that is obtained by employing debt in the capital structure of the firm. Now is this view correct one?
Royston Dias Hi Royston, Two things: first look at the formula that hopefully you can now derive with levered and unleveled beta and figure out how the levered beta changes as you vary Tc from 0 to 1. Second, (and this may be perceived of as picky but I am not sure how precise you wish to be), but beta is a measure of non-diversifiable risk and not financial risk. To get a much better understanding of beta then see the "Discount Rate for Financial Securities (Risk and Return"" video on the "Corporate Finance Lecture Series" playlist at the "Understanding Finance" channel. See ruclips.net/channel/UC4XJHGqb_WCUXQkHvKN5EwAplaylists
👍👍👍👍
Boss mode, right?
you're beautiful thanks
Thank you :)
This video is helpful, should've been about 8min shorter. Way too many rhetorical questions and pauses.
Thanks a lot!
BLOODINTHECUP You are welcome.