Hamada Equation

In corporate finance, Hamada’s equation, named after Robert Hamada, is used to separate the financial risk of a levered firm from its business risk. The equation combines the Modigliani-Miller theorem with the capital asset pricing model. It is used to help determine the levered beta and, through this, the optimal capital structure of firms.

Hamada’s equation relates the beta of a levered firm (a firm financed by both debt and equity) to that of its unlevered (i.e., a firm which has no debt) counterpart. It has proved useful in several areas of finance, including capital structuring, portfolio management and risk management, to name just a few. This formula is commonly taught in MBA Corporate Finance and Valuation classes. It is used to determine the cost of capital of a levered firm based on the cost of capital of comparable firms. Here, the comparable firms would be the ones having similar business risk and, thus, similar unlevered betas as the firm of interest. so The equation is

where βL and βU are the levered and unlevered betas, respectively, T the tax rate and the leverage, defined here as the ratio of debt, D, to equity, E, of the firm.

The importance of Hamada's equation is that it separates the risk of the business, reflected here by the beta of an unlevered firm, βU, from that of its levered counterpart, βL, which contains the financial risk of leverage. Apart from the effect of the tax rate, which is generally taken as constant, the discrepancy between the two betas can be attributed solely to how the business is financed.

The equation is often wrongly thought to hold in general. However, there are several key assumptions behind the Hamada equation:

This is an excerpt from the article Hamada Equation from the Wikipedia free encyclopedia. A list of authors is available at Wikipedia.

Hamada’s equation relates the beta of a levered firm (a firm financed by both debt and equity) to that of its unlevered (i.e., a firm which has no debt) counterpart. It has proved useful in several areas of finance, including capital structuring, portfolio management and risk management, to name just a few. This formula is commonly taught in MBA Corporate Finance and Valuation classes. It is used to determine the cost of capital of a levered firm based on the cost of capital of comparable firms. Here, the comparable firms would be the ones having similar business risk and, thus, similar unlevered betas as the firm of interest. so The equation is

where βL and βU are the levered and unlevered betas, respectively, T the tax rate and the leverage, defined here as the ratio of debt, D, to equity, E, of the firm.

The importance of Hamada's equation is that it separates the risk of the business, reflected here by the beta of an unlevered firm, βU, from that of its levered counterpart, βL, which contains the financial risk of leverage. Apart from the effect of the tax rate, which is generally taken as constant, the discrepancy between the two betas can be attributed solely to how the business is financed.

The equation is often wrongly thought to hold in general. However, there are several key assumptions behind the Hamada equation:

This is an excerpt from the article Hamada Equation from the Wikipedia free encyclopedia. A list of authors is available at Wikipedia.

The article Hamada Equation at en.wikipedia.org was accessed 25 times in the last 30 days. (as of: 11/10/2013)

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Hamada Equation Definition | Investopedia

A fundamental analysis method of analyzing a firm's costs of capital as it uses
additional financial leverage, and how that relates to the overall riskiness of the ...

www.investopedia.com/terms/h/hamadaequation.asp

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Hamada's equation - Wikipedia, the free encyclopedia

In corporate finance, Hamada's equation, named after Robert Hamada, is used to
separate the financial risk of a levered firm from its business risk. The equation ...

en.wikipedia.org/wiki/Hamada's_equation

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Hamada Equation.pdf

Hamada Equation. • a model which is based on CAPM, and adjusts Я for
financial risk. • ЯL = ЯU[1 + (1 - T)(D/E)]. • ЯU is the unleveraged (zero-debt) beta
, ЯL ...

www.usfca.edu/fac-staff/gonzales/Web--617/Hamada%20Equation.pdf

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Hamada's equation: Definition from Answers.com

Hamada Equation A fundamental analysis method of analyzing a firm's costs of
capital as it uses additional financial leverage, and.

www.answers.com/topic/hamada-s-equation

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Incorporating default risk into Hamada's Equation for application to ...

May 14, 2007 ... the issue and provides a robust modification to Hamada's Equation, ... Hamada's Equation (HE), which relates the beta of a levered firm to that ...

mpra.ub.uni-muenchen.de/3190/1/MPRA_paper_3190.pdf

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An Arbitrage Model for Calculating Firm Beta at ... - Sciedu Press

Nov 6, 2012 ... Traditionally, the Hamada Equation is used to estimate a firm's levered ... Hamada Equation is its assumption that the cost of debt is equal to the ...

www.sciedu.ca/journal/index.php/afr/article/download/1660/1023

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Incorporating Default Risk into Hamada's Equation for Application to ...

ification to Hamada's Equation, which achieves this consistency. Abstract.
Implemented widely in the area of corporate finance, Hamada's Equation
enables.

rdcohen.50megs.com/IDRHEq.pdf

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LEVERED AND UNLEVERED BETA - IESE Business School

Fernández (2004), equation [12] is the difference of two present values. ..... Formula (4a) of Hamada (1972) is also equal to [33], although Hamada assumed
that ...

www.iese.edu/research/pdfs/di-0488-e.pdf

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Jamada paper

A careful algebraic derivation of the well-known Hamada Equation for levered
beta (Hamada 1972) reveals a refinement that implies that the Hamada Equation
...

www.munshi.4t.com/papers/jamada.html

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Hamada's equation - Wikipedia, the free…

In corporate finance, Hamada’s equation, named after Robert Hamada, is used to separate the financial risk of a levered firm from its business risk.

en.wikipedia.org/wiki/Hamada%27s_Equation

Search results for "Hamada Equation"

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Hamada Equation in science

Incorporating default risk into Hamada's Equation for application to ...

Feb 11, 2013 ... Incorporating default risk into Hamada's Equation for application to capital
structure ... Hamada's Equation enables one to separate the financial risk of a
levered firm from its business ... the Munich University Library in Germany.

Incorporating default risk into Hamada's Equation ... - Ideas - RePEc

Implemented widely in the area of corporate finance, Hamada's Equation
enables ... Paper provided by University Library of Munich, Germany in its series
MPRA ...

A Short Note on the Hamada Formula by Michel Levasseur, Eric De ...

Apr 2, 2007 ... Most leading finance textbooks introduce the Hamada formula to adjust the
market beta for leverage effects. A debate has ... University of Lille II ...

[PDF]Unison CRA Leverage and the Cost of Capital December 2009 PDF

Dec 2, 2009 ... simplified Brennan-Lally model and the Hamada formula for the classical CAPM.
This note ... No. 663, University of Navarra, December, p. 1.

[PDF]LEVERED AND UNLEVERED BETA - IESE Business School

IESE Business School-University of Navarra - 1. LEVERED ..... Formula (4a) of Hamada (1972) is also equal to [33], although Hamada assumed that the value.

Hamada's equation - Wikipedia, the free encyclopedia

In corporate finance, Hamada's equation, named after Robert Hamada, is used to
separate the financial risk of a levered firm from its business risk. The equation ...

Hamada Equation Definition | Investopedia

A fundamental analysis method of analyzing a firm's costs of capital as it uses
additional financial leverage, and how that relates to the overall riskiness of the ...

Hamada's equation, the Sarbanes-Oxley Act of 2002 and ... - Emerald

Author(s): S. Paulo, (Commerce Division, Lincoln University, Canterbury, New ...
Purpose – The purpose of this paper is to show that Hamada's equation, which ...

How to Calculate Levered Beta | eHow

Robert Hamada combined the capital asset pricing model and the Modigliani and
Miller capital ... The Hamada Equation illustrates that when a firm increases its
debt, the ... University of San Francisco: Hamada Equation (PDF) · South-Western
...

Books on the term Hamada Equation

Fundamentals of Financial Management

It has been demonstrated, both theoretically and empirically, that beta increases
with financial leverage. G. The Hamada Equation specifies the effect of financial
leverage on beta: bL = bU[1 + (1 – T)(D/E)] 1. The Hamada Equation shows how
...

Handbook of Continued Fractions for Special Functions

Special functions are pervasive in all fields of science and industry. The most well-known application areas are in physics, engineering, chemistry, computer science and statistics. Because of their importance, several books and websites (see for instance http: functions.wolfram.com) and a large collection of papers have been devoted to these funct...

Business Valuations: Advanced Topics

80,000 Now that we have all of the variables for (10.8), * = E(rp) + (l ~ t)[E(rp)-E(rd
)]^ =1 175 + (l-.20)[.l 175-.08]^JJ =.125 HAMADA'S FORMULA Although equation
(10.7) gives the exact theoretical relationship of pe and Pp, in practice, Pp, the ...

Fundamentals of Financial Management, Concise 7th Edition

Gain a focused understanding of today's corporate finance and financial management with the market-leading approach in Brigham and Houston's Fundamentals of Financial Management (Concise Seventh Edition). This book's unique balance of clear concepts, contemporary theory, and practical applications helps readers better understand the ...

Fundamentals of Financial Management, Concise

13-3b The Hamada Equation Increasing the debt ratio increases the risks that
bondholders face and thus the cost of debt. More debt also raises the risk borne
by stockholders, which raises the cost of equity, rs. It is harder to quantify
leverage's ...

Fundamentals of Financial Management (with Thomson ONE - Business School Edition)

Designed to put readers "First in Finance" today, this fully revised thirteenth edition of FUNDAMENTALS OF FINANCIAL MANAGEMENT provides readers with a focused understanding of today's corporate finance and financial management. This market-leading book offers a unique balance of clear concepts, contemporary theory, and practical app...

Intermediate Financial Management, 11th ed.

The rsU from Equation 16-1 is the required discount rate in a world with no taxes,
whereas the rsU in Equation 16-5 is the ... The beta of an unlevered firm is
denoted by bU, and Hamada's equation is (16–7) b 5bU[1 1 (1 2 T)(D/S)] Note
that ...

Fundamentals of Financial Management (with Thomson ONE - Business School Edition)

Count on the renowned author team that's First in Finance to deliver a unique balance of clear concepts, contemporary theory, and practical applications that ensures a thorough understanding of today's corporate finance and financial management. Brigham/Houston's FUNDAMENTALS OF FINANCIAL MANAGEMENT, 12E presents a solid, focused fou...

Infrastructure Investing: Managing Risks & Rewards for ...

The beta of the asset is a value-weighted average of the equity beta and debt
beta, as shown in equation 8.8 . 4 βββadeDVEV=+ (8.8) ... The cost of levered
equity is given by the Hamada Equation (equation 8.9 ). 5 Note also that the unle-
...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition)

Discover the latest theory, trusted research, real-world examples, and use of financial technology with the leading choice in corporate finance texts, Brigham/Houston's FUNDAMENTALS OF FINANCIAL MANAGEMENT, CONCISE EDITION, Sixth Edition. As concise as it is easy to understand, this complete introduction to corporate finance puts you on the fo...

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Hamada Equation

Hamada Equation

No Surrendo: The Hamada Equation

A big deal for companies is to decide whether to finance their company with debt (loans) or equity (stock). Too much debt can cause risk to the shareholders, but it offers tax advantages.

nosurrendo.blogspot.com/2009/03/hamada-equation.html
Calculation of Carbonation Prediction of Concrete by HAMADA formula | Science & Engineering Calculation @ SaECaNet

Microsoft Excel Filecarbonation_prediction.1.1.0 Carbonation Prediction of Concrete by HAMADA

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