DEFINITION of 'Hamada Equation'
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 firm. The measure is used to summarize the effects this type of leverage has on a firm's cost of capital (over and above the cost of capital as if the firm had no debt). The equation is:
BREAKING DOWN 'Hamada Equation'
The equation is used to determine the effects of financial leverage on a firm, as measured by the Hamada coefficient. The higher the coefficient, the higher the risk associated with the firm. For example, say a firm has a debt to equity ratio of 0.60, a tax rate of 33%, and a debt free beta of 0.95. The Hamada coefficient would be about 1.33 {0.95[1+(10.33)(0.60)]}. This means that financial leverage, for this firm, increases the overall risk by a factor of 0.38, or by 40%.
This equation quantifies the effects financial leverage has on a firm, and can serve as a quick and dirty analysis of a firm's overall business risk as it relates to the returns from the market overall.

Leverage Ratio
Any ratio used to calculate the financial leverage of a company ... 
Cost Of Capital
The required return necessary to make a capital budgeting project, ... 
Operating Leverage
Operating measurement is a measurement of the degree to which ... 
High Beta Index
An index composed of companies with high betas trading on the ... 
Leverage
1. The use of various financial instruments or borrowed capital, ... 
Beta
Beta is a measure of the volatility, or systematic risk, of a ...

Investing Basics
Reading The Balance Sheet
Learn about the components of the statement of financial position and how they relate to each other. 
Active Trading
How Companies Use Derivatives To Hedge Risk
Derivatives can reduce the risks associated with changes in foreign exchange rates, interest rates and commodity prices. 
Options & Futures
Putting Management Under The Microscope
We tell you where to find the telltale signs of corporate misdeeds. 
Investing Basics
What Does In Specie Mean?
In specie describes the distribution of an asset in its physical form instead of cash. 
Economics
Calculating Cross Elasticity of Demand
Cross elasticity of demand measures the quantity demanded of one good in response to a change in price of another. 
Fundamental Analysis
Emerging Markets: Analyzing Colombia's GDP
With a backdrop of armed rebels and drug cartels, the journey for the Colombian economy has been anything but easy. 
Investing
A Look at 6 Leading Female Value Investors
In an industry still largely predominated by men, we look at 6 leading female value investors working today. 
Term
What Is Financial Performance?
Financial performance measures a firm’s ability to generate profits through the use of its assets. 
Stock Analysis
The Biggest Risks of Investing in FireEye Stock
Examine the current state of FireEye, Inc., and learn about some of the biggest risks of investing in this cybersecurity company's stock. 
Stock Analysis
The Biggest Risks of Investing in Gilead Stock
Examine the current position of Gilead Sciences, Inc., and learn the major risks for investors considering buying Gilead stock.

What is a profit and loss (P&L) statement and why do companies publish them?
A profit and loss (P&L) statement, or balance sheet, is essentially a snapshot of a company's financial activity for ... Read Full Answer >> 
How do I use discounted cash flow (DCF) to value stock?
Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >> 
What is the formula for calculating compound annual growth rate (CAGR) in Excel?
The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >> 
What is the formula for calculating weighted average cost of capital (WACC) in Excel?
When analyzing different financing options, companies need to look at how much it will cost to fund operations. There are ... Read Full Answer >> 
Why can additional paid in capital never have a negative balance?
The additional paidin capital figure on a company's balance sheet can never be negative because companies do not pay investors ... Read Full Answer >> 
When does the fixed charge coverage ratio suggest that a company should stop borrowing ...
Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>