What is the 'Hamada Equation'
The Hamada equation is a fundamental analysis method of analyzing a firm's cost 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:
B(L) = B(U)[1 + (1T)(D/E)]
where:
 B(L) = levered beta
 B(U) = unlevered beta
 T = tax rate
 D/E = debt to equity ratio
BREAKING DOWN 'Hamada Equation'
The equation draws upon the ModiglianiMiller theorem on capital structure and extends an analysis to quantify the effect of financial leverage on a firm. Beta is a measure of volatility or systemic risk relative to the overall market. The Hamada equation, then, shows how beta of a firm changes with leverage.
The higher the beta 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 an unlevered beta of 0.75. The Hamada coefficient would be 0.75[1 + (10.33)(0.60], or 1.05. This means that financial leverage for this firm increases the overall risk by 0.30 (1.05  0.75), or 40%.
Who is Robert Hamada?
Robert Hamada is a professor of finance at the University of Chicago Booth School of Business. Professor Hamada served as the dean of the business school from 19932001, and has taught at the University of Chicago since 1966. His equation appeared in his paper, "The Effect of the Firm's Capital Structure on the Systemic Risk of Common Stocks" in Journal of Finance in May 1972.

Unlevered Beta
Unlevered beta is the beta of a company without any debt, and ... 
Unlevered Cost of Capital
Unlevered cost of capital is an evaluation of a capital project's ... 
Smart Beta ETF
A smart Beta ETF is a type of exchangetraded fund that uses ... 
Accounting Equation
The accounting equation, also known as the balance sheet equation, ... 
Equation of Exchange
The equation of exchange is a model that shows the correlation ... 
Expanded Accounting Equation
The expanded accounting equation is derived from the accounting ...

Investing
How To Calculate Beta Of A Private Company
We explain two methods for calculating the beta of a private company. 
Investing
Beta: Gauging Price Fluctuations
Learn how to properly use this measure that can help you meet your criteria for risk. 
Investing
Beta: Know the Risk
Beta says something about measuring price risk in stocks, but how much does it say about fundamental risk factors too? 
Investing
Build Diversity Through Beta
In conjunction with stock valuation ratios like the pricetoearnings ratio and the pricetoearningsgrowth ratio, a stock's measure of volatility known as beta can help investors build a diversified ... 
Investing
How AQR Places Bets Against Beta
Learn how the bet against beta strategy is used by a large hedge fund to profit from a pricing anomaly in the stock market caused by high stock prices. 
Financial Advisor
Calculating Beta: Portfolio Math For The Average Investor
Beta is a useful tool for calculating risk, but the formulas provided online aren't specific to you. Learn how to make your own. 
Investing
Smart Beta: Can Low Beta Equal High Risk?
Low beta may not necessarily mean low risk when it comes to some smart beta strategies. 
Investing
5 LowBeta DJIA Stocks To Know
Check out five lowbeta stocks that can help you to diversify your portfolio. 
Investing
Smart Beta ETF Myths and Misconceptions
Discover smart beta exchangetraded funds (ETFs), and learn about some of the common misconceptions and characteristics of this type of product. 
Investing
Investopedia's Guide to Smart Beta ETF Investing
Smart Beta may be one of those financial terms that raises the ire of many market participants, but its success in spawning a new class of exchange traded funds (ETFs) is indisputable.

How do I unlever beta?
Learn how to calculate the unlevered beta of a company and understand the differences between standard beta versus unlevered ... Read Answer >> 
How does debt affect a company's beta?
Understand the difference between a company's levered beta and unlevered beta. Learn how debt affects a company's levered ... Read Answer >> 
How does beta measure a stock's market risk?
Learn how beta is used to measure risk versus the stock market, and understand how it is calculated and used in the capital ... Read Answer >> 
Why do I need to unlever beta when making WACC calculations?
Dive into weighted average cost of capital calculations, and see why firms both unlever and relever beta to compare debt ... Read Answer >> 
How does market risk affect the cost of capital?
Find out how market risk directly affects the total cost of capital, including how to use the capital asset pricing model ... Read Answer >>