You asked a very good question. We actually relever beta using the industry debt to equity ratio and industry beta. Using BP stock research report as an example, the original debt to equity ratio is 27.1% while the original beta is 0.72. We use the industry debt to equity ratio of 29.3% to compute the relevered beta of 0.77 for our WACC calculation. Sometimes the numbers happen to come out the same as the original figures, but this is a fluke rather than a consistent method we use.
A follow up question is we don't make any assumptions of cash flow viability when we compute the industry D/E or beta. In nearly every case, we use the industry averages to compute a stocks specific weighted average cost of capital. For any research report, we encourage our visitors to use the experimental mode, where they can change numbers, formulas and assumptions to suit your own purposes.
If you have any other questions, please respond back. We hope this helped. Thank you, Dave
