Hamada equation
Principles of Finance glossary · Cost of Capital & Capital Structure
Definition
The CAPM-consistent relationship between levered and unlevered equity beta: β_L = β_U · [1 + (1 - T)(D/E)]. Used to unlever a comparable's beta and relever it at a target firm's capital structure.
Hamada equation in plain English
A company's "beta" measures how jumpy its stock is compared to the overall market. But borrowing money (debt) makes a company's stock jumpier, so two firms in the same business can have different betas just because one borrowed more. The Hamada equation lets you strip debt's effect out of a comparable company's beta to find its pure business risk, then add your own target company's debt level back in — like adjusting a recipe someone else measured to fit your own oven. In β_L = β_U · [1 + (1 - T)(D/E)], more debt relative to equity (D/E) raises the beta, while taxes (T) soften the effect because interest is tax-deductible.
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