Financial
Hamada Equation formula: unlever peer Beta & relever to target Debt/Equity
Strip financial leverage out of comparable-company betas via Beta_U = Beta_L / (1 + (1 - Tax)*D/E) and relever to your valuation target capital structure.
Adjust an estimated equity beta for financial leverage
The simplified Hamada adjustment assumes zero market beta for debt and a tax benefit from debt. Use debt-to-equity ratios based on consistent market-value measurements and positive equity; D/E is not debt divided by total capital. B4 is an illustrative tax-rate assumption, not a jurisdictional tax calculation.
Unlever the peer estimate using betaU = betaL / (1 + (1-t)×peerD/E), then apply the target leverage factor. This example assumes the same tax rate for peer and target. If they differ, use separate tax inputs. The result remains a model estimate; plugging it into CAPM does not produce an exact cost of equity. Negative equity betas are allowed, but negative debt/equity ratios are outside this example.
| Valuation Input / Step | Cell | Example Value | Beta Impact |
|---|---|---|---|
| Peer Observed Levered Beta | B2 | 1.38 | Includes peer debt risk |
| Peer D/E Ratio & Tax Rate | B3 = 0.50, B4 = 0.24 | 1 + (1 - 0.24)*0.50 = 1.38 | After-tax leverage factor |
| Unlevered Asset Beta (Beta_U) | B2 / 1.38 | 1.00 | Estimated unlevered beta under model assumptions |
| Target D/E ratio (B5) | 1.00 (50% Debt / 50% Eq) | 1.00 * (1 + 0.76 * 1.00) | Relevered Beta = 1.76! |
Hamada Unlevered (Asset) Beta formula
Removes tax-effected financial leverage from a comparable company's observed equity beta.
=IF(OR(COUNT(B2:B4)<>3,B3<0,B4<0,B4>1),"Invalid inputs",ROUND(B2 / (1 + (1 - B4) * B3), 4))Single-cell Unlever & Relever to Target D/E (B5) formula
At Target D/E = 0 (all-equity balance sheet), Relevered Beta equals Unlevered Asset Beta (1.00).
=IF(OR(COUNT(B2:B5)<>4,B3<0,B5<0,B4<0,B4>1),"Invalid inputs",LET(bu, B2 / (1 + (1 - B4) * B3), ROUND(bu * (1 + (1 - B4) * B5), 4)))Try the example
Use the original values or change them to test your understanding.