Every company valuation requires the calculation of a discount rate to discount at the present day future cash flows to arrive at the intrinsic value of a company.
In company valuation the discount rate, or more precisely the weighted average cost of capital (WACC), is obtained by a weighted average of the cost of equity and the cost of debt.
WACC = (Cost of Equity * Market Capitalization) + ( Cost of Debt * Market Value of Debt * 1-Tax Rate)
Where the cost of equity formula is:
Cost of Equity = Risk-Free Rate + Equity Risk Premium * Beta
The risk-free rate notably refers to the interest rate investors can reasonably expect to receive from assets with a chance of default close to zero like sovereign bonds such as the U.S. 10-Year Treasury, the U.K. 10-Year Gilt, or the Euro Area 10-Year Government Benchmark Bond.
When investors decide to invest in non-risk-free assets, they require a greater return to compensate for the higher risks undertaken.
In company valuation, the equity risk premium represents the expected greater return, however, not every company has the same degree of risk. The beta captures the degree of risk of a company, or of an industry, compared to the whole market.
While this page provides a comprehensive list of equity risk premiums for 39 different countries and instructions on their utilization, as regards the beta, you can find the betas you need for 37 different industries right here!
More precisely, the following list presents industry unlevered betas which differ from normal industry betas as unlevered betas exclude the effect of financial leverage of the overall risk of the industry.
Industry Unlevered Beta = Industry Beta / [1 + (1-Industry Tax Rate) * Industry Debt-to-Equity ratio]
In company valuation, the industry unlevered beta is used to arrive at the company beta by multiplying the unlevered industry beta of the industry where the company operates by the financial leverage of the company analysed.
Company Beta = Industry Beta * [1 + (1-Company Tax Rate) * Company Debt-to-Equity ratio]
| Industry | Beta 2 y | Beta 5 y |
| Aerospace and Defense | 0,73 | 0,95 |
| Airline | 0,27 | 0,46 |
| Automobile | 0,65 | 0,86 |
| Beverage | 0,32 | 0,51 |
| Biotechnology | 0,86 | 0,70 |
| Chemical | 0,64 | 0,75 |
| Commercial Service | 0,54 | 0,62 |
| Communication Equipment | 0,71 | 0,70 |
| Construction | 0,47 | 0,61 |
| Consumer Service | 0,43 | 0,53 |
| Electrical Equipment | 0,73 | 0,85 |
| Electronic Equipment | 0,75 | 0,81 |
| Entertainment | 0,52 | 0,63 |
| Food Product | 0,23 | 0,23 |
| Healthcare Service | 0,44 | 0,48 |
| Healthcare Equipment | 0,91 | 0,70 |
| Hotel and Restaurant | 0,48 | 0,68 |
| Household Durable | 0,76 | 0,69 |
| Industrial Conglomerate | 0,54 | 0,63 |
| Intercative Media | 0,87 | 0,81 |
| IT Services | 0,72 | 0,77 |
| Logistic and Air Freight | 0,52 | 0,64 |
| Luxury and Apparel | 0,80 | 0,85 |
| Machinery | 0,75 | 0,87 |
| Multiline Retail | 0,49 | 0,43 |
| Packaging | 0,50 | 0,49 |
| Personal Product | 0,32 | 0,28 |
| Pharmaceutical | 0,40 | 0,39 |
| Renewable Energy | 0,55 | 0,51 |
| Semiconductor | 1,11 | 1,18 |
| Software | 1,13 | 0,85 |
| Speciality Retail | 0,63 | 0,63 |
| Staples Retail | 0,28 | 0,28 |
| Technology Hardware | 0,57 | 0,76 |
| Telecommunication | 0,22 | 0,26 |
| Transportation | 0,40 | 0,70 |
| Utilities | 0,31 | 0,31 |
Last update: 31/03/2024