How to Answer “How do you unlever and relever beta?” in Investment Banking Interviews

Start with the “why” before equations: you unlever beta to remove the impact of capital structure and isolate the company’s operating (asset) risk; you relever beta to reflect a new or target debt/equity mix.

Define terms explicitly:

• Levered (equity) beta, βE: what you observe from the market (or a data source). It reflects the risk borne by equity holders, so leverage increases it.
• Unlevered (asset) beta, βA: the risk of the underlying assets/operations, independent of financing.

Then state the common use-case in Investment Banking: unlever betas for comparable companies to get a peer/industry asset beta, and then relever to the company’s target capital structure for cost of equity (CAPM) and ultimately WACC.

Give the standard unlevering relationship used in interviews (typically assuming debt beta is approximately zero unless told otherwise):

• βA = βE / (1 + (1 − t) · D/E)

Where t is the marginal tax rate and D/E is the debt-to-equity ratio.

Key execution points that interviewers listen for in a beta calculation interview:

• Use market value of equity (share price × diluted shares). For debt, market value is ideal; book value is a common practical proxy—just state the assumption.
• The (1 − t) term reflects the tax shield from debt in the standard MM-with-taxes intuition.
• If the company is highly levered or distressed, note that the “debt beta = 0” simplification becomes weaker (but it’s fine for most interview settings unless prompted).

To make the output usable in valuation techniques, show that you’d rely on a peer set rather than one regression:

• Unlever each comparable’s βE to get a set of βA values, then use a median (or mean) to reduce noise and outliers.
• Ensure consistency: same tax-rate approach across comps, and consistent debt definition (net vs gross) if you’re comparing leverage.
• If excess cash is clearly material, mention the conceptual adjustment: cash has near-zero beta and can dampen observed equity beta; practitioners sometimes move toward an “operating” beta by treating cash separately (i.e., risk sits in operating assets).

This is also where you show judgement around investment banking concepts: prefer cleaner “pure-play” comps when business mix differs materially, because segment differences can matter as much as leverage.

Once you have the asset beta you want to use (company-specific or peer median), relever it to the target capital structure—current, management target, sector average, or a post-deal pro forma structure:

• βE,target = βA · (1 + (1 − t) · D/E_target)

Then link to the next steps the model would take:

• Use CAPM to get cost of equity: Re = Rf + βE,target · ERP.
• Combine cost of equity with after-tax cost of debt and target weights to estimate WACC.

Close with a quick direction check: higher target D/E should increase βE,target; low leverage or net cash should make βE closer to βA. That’s exactly the “interpretation” piece interviewers want in a financial modeling interview context.