Hamada's equation

Description

In corporate finance, Hamada’s equation, is used to separate the financial risk of a levered firm from its business risk. Hamada’s equation relates the beta of a levered firm (a firm financed by both debt and equity) to that of its unlevered (i.e., a firm which has no debt) counterpart.

Related formulas

Variables

βLLevered beta (dimensionless)
βuUnlevered beta (dimensionless)
TThe tax rate (dimensionless)
ϕThe leverage (ratio of debt, D, to equity, E, of the firm) (dimensionless)