Hamada's equation

The Hamada's Equation calculator computes levered beta (β_L) for a business based on the unlevered beta (β_U), the tax rate (T) and leverage (φ).

INSTRUCTIONS: Enter the following:

• (B_U) Un-leveraged beta.
• (T) Tax percentage.
• (φ) Leverage (debt to equity ratio: CLICK HERE).

Leveraged Beta (B_L): The calculator returns the leveraged beta (B_L).

The Math / Science

Hamada's equation is used to separate the financial risk of a levered firm from its business risk. The equation combines Modigliami-Miller therom with the capital asset pricing model. It is used to help determine the levered beta, and, through this, the optimal capital structure of firms. It relates the beta of a levered firm (a firm financed by debt and equity) to that of its unlevered (a firm which has no debt) counterpart. It is used to determine the cost of capital of a levered firm based on the cost of capital of comparable firms. The equation is: `beta_L=beta_U[1+(1-T)phi]`, where:

• β_U = levered beta
• β_L = unlevered beta
• T = tax rate (as a percentage)
• φ  = leverage or debt to equity ratio

References

Wikipedia (https://en.wikipedia.org/wiki/Hamada%27s_equation)