Hamada Equation
The classic formula linking levered equity beta to unlevered (asset) beta and capital structure: equity_beta = asset_beta * (1 + (1 - tax_rate) * D/E). Used to (a) unlever a peer's observed equity beta to isolate business risk, and (b) re-lever an average asset beta at a target capital structure to produce the cost-of-equity input for a forward DCF. The Hamada form assumes risk-free debt (debt beta = 0), which is fine for investment-grade firms but understates levered beta for high-yield or distressed targets; the Modigliani-Miller variant equity_beta = asset_beta + (asset_beta - debt_beta) * (D/E) * (1 - t) is the corrected form when debt itself is risky.
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Related terms
Ambiguity Aversion · Anchored Assumption · Asset Beta · Bank ROE Spread · Banker Pitch Deck · Beta
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