What is Hamada Equation?
The Hamada equation, named after economist Robert S. Hamada, is a financial formula that calculates the leveraged beta of a firm by adjusting the unleveraged beta to account for the impact of financial leverage. Leveraged beta measures a company's risk, incorporating the effects of both its equity and debt. The equation considers the tax shield on interest payments associated with debt, making it particularly relevant in assessing the risk profile of leveraged firms. It is expressed as the product of the unleveraged beta and a factor that accounts for the firm's debt percentage, debt-to-equity ratio, and the corporate tax rate. The Hamada equation provides a valuable tool for analysts and investors in evaluating the risk and return characteristics of companies with varying degrees of financial leverage.
How to Calculate Hamada Equation?
Hamada Equation calculator uses Leveraged Beta = Unleveraged Beta*(1+(1-Tax Rate)*Debt to Equity (D/E)) to calculate the Leveraged Beta, The Hamada Equation formula is defined as a formula used in financial economics to estimate the leveraged beta of a leveraged firm. The leveraged beta reflects the risk of a firm's equity when it uses financial leverage (debt) to finance its operations. Leveraged Beta is denoted by β_{L} symbol.
How to calculate Hamada Equation using this online calculator? To use this online calculator for Hamada Equation, enter Unleveraged Beta (β_{UL}), Tax Rate (T_{%}) & Debt to Equity (D/E) (R_{D/E}) and hit the calculate button. Here is how the Hamada Equation calculation can be explained with given input values -> 272.16 = 7.2*(1+(1-0.08)*40).