What Is Unlevered Equity?
Unlevered equity is a term used when describing costs for a business, referring to equity that is not adjusted for any long-term debt accounting. It is used especially in cost analysis for business projects and long-term strategic planning. In scenarios like these, a business typically knows what type of funds it will be using for the project, which is where the equity comes in. Such analysis often frames the project-specific parameters or ideal assumptions for more straightforward results, which is why the equity is unlevered.
Unlevered describes the cost projections of project analysis and other business plans. If a cost is unlevered, this means that there is no additional factors attached to it because of debt. In other words, the cost will not be affected by debt payments, interest or claims on assets. These will not figure into cost projection for the project and will not affect the cash flows received from the project as revenue.
Unlevered equity is simply the cost of equity for a project, untouched by debt factors. This term is used when the business is using only equity to fund the project, only capital derived from investors purchasing stock in the company or original capital first used when the business formed. Since there is no debt financing to raise money for the project, it is naturally unlevered to begin with, making this a common term when 100 percent equity funding is involved.
Unlevered equity is not necessarily an accurate calculation. Many times the project itself will use financing at some point during operations, even if the only money used to fund it is from equity. But debt factors can make forecasts very complicated. An unlevered scenario is much easier to calculate, tweak and examine than one filled with additional debt expenses. Also, when it comes to investor claims and similar legal matters the amounts are often based on the unlevered equity, giving another reason to make the calculation.
Discount rates are rates used to lower expected revenues from projects. This should not be confused with lowering revenues because of expected debt expenses. The discount rate is a percentage applied to returns on the project, created with a fomula used to account for things that are not connected with debt, primarily the time value of money that can change with inflation. A discount rate can easily be used an unlevered cost of equity calculation.