Reagent function and beta coefficient in the calculation of the discount rate - part 1 (stable level of debt)[Reagenční funkce a koeficient beta při kalkulaci diskontní míry - 1. část (stabilní úroveň cizího kapitálu)]

The article examines the problems associated with the application of the simplest and most popular equation for calculating the debt beta coefficient. It shows that the use of this function may result in a significant error in the resulting valuation of the company, since it assumes that foreign capital has a stable level on a permanent basis and is at the same time risk-free. The text shows that if debt is stable, the present value of the tax shield and thus the resulting value of the enterprise is not dependent on the cost of debt. However, if there is a different level of interest on debt from the risk-free interest rate in the financial plan, the valuation contains a different assumption regarding the cost of debt in the plan and another at a discount rate. The error in the resulting business value is due to this internal inconsistency. It is further shown in the text that the function for leveraged beta must therefore be supplemented by a beta of debt and it is explained how to calculate this beta of debt. This creates a formula for leveraged beta that provides the same valuation of the business as the function for leveraged cost of equity based on the Miller and Modigliani model.