Aswath Damodaran 326
Estimating Cost of Equity
Unlevered Beta = 1. 0674 (Bottom up beta based upon Disney’s businesses)
Market premium = 4. 82 % T.Bond Rate = 4. 00 % Tax rate= 37. 3 %
Debt Ratio D/E Ratio Levered Beta Cost of Equity
0. 00 % 0. 00 % 1. 0674 9. 15 %
10. 00 % 11. 11 % 1. 1418 9. 50 %
20. 00 % 25. 00 % 1. 2348 9. 95 %
30. 00 % 42. 86 % 1. 3543 10. 53 %
40. 00 % 66. 67 % 1. 5136 11. 30 %
50. 00 % 100. 00 % 1. 7367 12. 37 %
60. 00 % 150. 00 % 2. 0714 13. 98 %
70. 00 % 233. 33 % 2. 6291 16. 67 %
80. 00 % 400. 00 % 3. 7446 22. 05 %
90. 00 % 900. 00 % 7. 0911 38. 18 %
This reproduces the levered beta, using the formula developed during the risk
and return section. The unlevered beta of 1.0674 is the bottom-up unlevered beta.
BetaLevered = Unlevered Beta (1 + (1-t) (Debt/Equity Ratio)) In calculating the
levered beta in this table, we assumed that all market risk is borne by the equity
investors; this may be unrealistic especially at higher levels of debt. We will also
consider an alternative estimate of levered betas that apportions some of the
market risk to the debt:
"levered = "u [1+(1-t)D/E] - "debt (1-t) D/E
The beta of debt is based upon the rating of the bond and is estimated by
regressing past returns on bonds in each rating class against returns on a market
index. The levered betas estimated using this approach will generally be lower
than those estimated with the conventional model
