Ch 13 Cyber Problem handout

Ch 13 Cyber Problem - CAPITAL STRUCTURE AND LEVERAGE Applying the Hamada equation We previously introduced the concept of the Capital Asset Pricing

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
CAPITAL STRUCTURE AND LEVERAGE Applying the Hamada equation  We previously introduced the concept of the Capital Asset Pricing Model (CAPM).  The  CAPM contends that all stocks have an element of market risk.  This market risk is  materialized in the form of beta, which is determined by the covariance of an asset's  returns with the market returns divided by the variance of the market returns.  We arrive  at an asset beta by running a linear regression of an asset's returns against market  returns. However, we have never really addressed the matter of what drives beta.  In 1969, Robert Hamada published his paper, "Portfolio Analysis, Market Equilibrium,  and Corporation Finance," wherein he combined the traditional CAPM and the Modigliani  and Miller capital structure theory to create what is now called the "Hamada equation."  The Hamada equation seeks to illustrate how financial leverage (by increasing debt) 
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/20/2008 for the course BUS 4243 taught by Professor Marko.tengesdal during the Spring '08 term at Texas Woman's University.

Ask a homework question - tutors are online