Houlihan Lokey Interview Questions 2027: Levered vs Unlevered Beta & How to Answer
Answer Houlihan Lokey interview questions on levered vs. unlevered beta precisely: levered beta reflects a company's equity risk including its debt load, while unlevered beta strips out leverage to show pure business risk — and you convert between them with the Hamada equation using the debt-to-equity ratio and tax rate. This CAPM detail is commonly reported by candidates.
What These Houlihan Lokey Interview Questions Assess
This question is commonly reported by candidates interviewing at Houlihan Lokey for 2027 roles. It assesses cost-of-capital depth: interviewers want the definition, the conversion formula, and — most importantly — why bankers unlever and relever betas when valuing companies.
How to Answer Houlihan Lokey Interview Questions Like This
Interviewers score technical questions on your process, not just the final answer. State your assumptions first, work through the steps out loud in order, and sanity-check your conclusion at the end.
- Define levered beta: equity beta reflecting both business risk and financial (leverage) risk.
- Define unlevered (asset) beta: business risk alone, with leverage effects removed.
- Give the Hamada conversion: Levered Beta = Unlevered Beta × [1 + (1–tax) × (D/E)], and explain each input.
- Explain the use case: unlever peer betas, take the median, then relever at the target's capital structure for its cost of equity.
- Note the intuition: more debt amplifies equity volatility, so levered beta rises with leverage.
Example line: "Levered beta is the equity risk you observe — business risk plus leverage risk. Unlevered beta removes the leverage effect via the Hamada equation, giving pure asset risk. In practice I'd unlever each peer's beta, take the median, and relever it at my target's debt-to-equity to estimate its cost of equity."
Common Mistakes in Houlihan Lokey Interview Questions Answers
- Mixing up which direction the formula runs.
- Forgetting the tax shield term (1–tax) in the Hamada equation.
- Not knowing why the unlever/relever process exists at all.
Beta questions are where “I know CAPM” claims get tested — the Hamada equation and its purpose must be fluent. Drill both directions of the conversion.
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FAQ
Why not just use the company's own regression beta?
You can — but for private companies or thinly traded names, the peer unlever/relever method is the standard workaround.
Does higher leverage always mean higher levered beta?
Directionally yes, holding business risk constant — that's the core intuition to state.
What tax rate goes into the Hamada equation?
The marginal corporate tax rate, since it drives the debt tax shield — note it may vary by region.
What is an asset beta?
Another name for unlevered beta — the risk of the firm's assets independent of financing.
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