What formula is used for unlevering beta?

The formula used for unlevering beta is designed to isolate a company's risk from debt financing, providing an understanding of its inherent asset risk without the influence of debt. The correct formula reflects this adjustment by essentially removing the financial leverage effect on the levered beta.

In this instance, by using β Unlevered = β(Levered) (1 + (Debt / Equity)(1 − t)), the formula illustrates that the unlevered beta is derived from the levered beta, adjusted for both the company’s debt-to-equity ratio and the tax shield provided by debt. Here, (1 + (Debt / Equity)(1 − t)) accounts for the risk premium that debt introduces, while also factoring in the tax benefits associated with interest payments.

This allows investors and analysts to better assess the company's core performance and risk profile absent the effects of its capital structure, which is crucial for making informed investment decisions. In comparison, the other options describe incorrect relationships or misrepresent the impact of financial leverage on the beta coefficients.