Beta (β)

Beta (β) measures the systematic risk of an asset: its sensitivity to market-wide fluctuations. It is the risk multiplier in the CAPM formula for the cost of equity: ke = Rf + β × MRP. A beta of 1.0 means the asset moves in line with the market; above 1.0 it is more volatile; below 1.0 less sensitive; a zero or negative beta reflects uncorrelated or inverse returns. By extension, beta is also a key driver of the WACC. For unlisted companies, beta is estimated from listed comparable companies: unlevered to strip out the effect of each comparable's capital structure (asset beta), averaged across the peer group, then relevered to the target company's own capital structure. This unlevering-relevering process is one of the most technically sensitive steps in WACC construction.

‍

Example: 8 listed European precision mechanics comparables have a median unlevered beta of 0.85. Relevered to the target's 40% gearing (14% tax rate): β_levered = 0.85 × (1 + (1 - 0.14) × 0.40) = 1.14. Applied in CAPM with an MRP of 6.5% and a risk-free rate of 1.0%: equity risk premium = 1.14 × 6.5% = 7.4%, base cost of equity = 8.4%. Adding a size premium (2.5%) and an SCRP (1.5%) yields a total cost of equity of 12.4%. Another illustration, for an unlisted Swiss industrial SME: 6 listed sector comparables show a median levered beta of 1.15; after unlevering (asset beta: 0.82) and relevering to the target's capital structure (debt/equity: 30%), the retained levered beta is 0.98, used in CAPM to derive a cost of equity of 9.4% and a WACC of 8.1%.

‍

Hectelion documents beta selection, unlevering and relevering rigorously in every WACC construction, a key focus area for tax authority and auditor review.