Hamada - Hamada Equation a model which is based on CAPM and...

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Hamada Equation • a model which is based on CAPM, and adjusts ß for financial risk • ß L = ß U [1 + (1 - T)(D/E)] • ß U is the unleveraged (zero-debt) beta, ß L is the “leveraged (levered) beta” • observe existing T, D/E and ß, and then rewrite the above to find ß U ß L ß U = 1 + (1 - T)(D/E) can now estimate the ß L (the “leveraged beta”) for various D/E, i.e. how r S (and P S ) change when D/E (and D/A) changes recall: r S = r RF + ß L (r M - r
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