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:
INVESTOPEDIA EXPLAINS '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.

Cost Of Capital
The required return necessary to make a capital budgeting project, ... 
Operating Leverage
A measurement of the degree to which a firm or project incurs ... 
Leverage
1. The use of various financial instruments or borrowed capital, ... 
High Beta Index
An index composed of companies with high betas trading on the ... 
Beta
A measure of the volatility, or systematic risk, of a security ... 
Quantitative Analysis
A business or financial analysis technique that seeks to understand ...

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. 
Trading Strategies
How can retirees protect their wealth in a bear market?
Look at some helpful hints about how to protect your retirement nest egg when the stock market is underperforming or the economy is in recession. 
Mutual Funds & ETFs
How do hedge funds use short selling?
Learn how hedge funds use short selling to profit from stocks that are falling in price. Explore different analytical techniques hedge funds employ to find investments. 
Fundamental Analysis
What is the difference between operating cash flow and net income?
Learn how net income is an income statement for a certain period of time, while cash flow shows inflows and outflows based on conversion of sales into cash. 
Fundamental Analysis
How do I calculate dividend payout ratio from a balance sheet?
Understand what the dividend payout ratio indicates and learn how it can be calculated using the figures from a company's balance sheet statement. 
Investing Basics
What is the effect of price inelasticity on demand?
Find out why price inelasticity of demand shows the relationship between demand and price if the price of an inelastic good is either lowered or raised. 
Fundamental Analysis
How do I calculate the debttoequity ratio in Excel?
Understand the basics of the debt to equity ratio, how it is interpreted as a measure of financial stability and how it is calculated in Microsoft Excel. 
Fundamental Analysis
What is the affect of the invisible hand on consumers?
Discover how consumers help initiate and benefit from the invisible hand of the market, which naturally coordinates trade in an exchange economy.