A levered DCF projects FCF after Interest Expense (Debt) and Interest Income (Cash) while an unlevered DCF projects FCF before the impact on Debt and Cash. There are two ways of projecting a company’s Free Cash Flow (FCF): on an unlevered basis, or on a levered basis. Do you use levered or unlevered free cash flow for DCF? The weighted average cost of capital (WACC) assumes the company’s current capital structure is used for the analysis, while the unlevered cost of capital assumes the company is 100% equity financed. It is used in the capital asset pricing model (CAPM) to estimate the return of an asset. The beta of a company measures how the company’s equity market value changes with changes in the overall market. Do you use asset beta or equity beta in CAPM? Beta is used in the capital asset pricing model (CAPM), which describes the relationship between systematic risk and expected return for assets (usually stocks). Which beta is used in CAPM?īeta is a measure of the volatility-or systematic risk-of a security or portfolio compared to the market as a whole. Does CAPM formula Use levered beta?Īfter relevering, we can use the levered Beta in the CAPM formula to calculate cost of equity.

It is better to use an unlevered beta over a levered beta when a company or investor wishes to measure a publicly-traded security’s performance in relation to market movements without the effects of that company’s debt factor.

Unlevered beta calculator