hard · Principles of Finance

Which variable in the Hamada equation (β_L = β_U [1 + (1 - t)(D/E)]) captures the 'tax shield' effect on equity risk?

1. The (1 - t) term used in the leverage multiplier.
2. The β_U term representing the asset beta.
3. The D/E ratio representing the market value of debt and equity.
4. The β_L term on the left side of the equation.

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