Below is a chart showing how dramatically a company’s equity beta can change with the expiration of derivative securities:

Source: Corporate Valuation: Theory, Evidence and Practice
Mark E. Zmijewski; Robert W. Holthausen

Key points:

  • A company’s overall Cost of Equity is the weighted average of the capital costs of its common stock and the derivatives tied to that stock (such as options, warrants, and stock-based compensation).
  • The cost of capital and beta of derivatives are always higher than those of the underlying stock, since derivatives are, in essence, leveraged instruments.
  • When the share of options and other derivatives in the firm’s equity increases, the beta and cost of common stock decrease.
    However, the overall weighted average remains unchanged.
    (For example: if a firm issues options and uses the proceeds to repurchase common shares, the total cost of equity stays the same, but the distribution between instruments changes.)
  • The cost of derivative-based equity can be calculated using both CAPM and the Black–Scholes model:

📌 Conclusion:
These formulas emphasize that when valuing equity, it is crucial to account for the weight of derivative instruments. In some cases, their share can be large enough to materially affect both the estimated cost of equity and its beta.

📚 Source:
Corporate Valuation: Theory, Evidence and Practice
Mark E. Zmijewski; Robert W. Holthausen, Second Edition