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Hamada Equation

Definition

In corporate finance, Hamada's equation, named after Robert Hamada, is used to separate the financial risk of a levered firm from its business risk. The equation combines the Modigliani-Miller theorem with the capital asset pricing model. It is used to help determine the levered beta and, through this, the optimal capital structure of firms.

What is the 'Hamada Equation'

The Hamada equation is a fundamental analysis method of analyzing a firm's costs of capital as it uses additional financial leverage, and how that relates to the overall riskiness of the firm. The measure is used to summarize the effects this type of leverage has on a firm's cost of capital (over and above the cost of capital as if the firm had no debt). The equation is:

Explaining 'Hamada Equation'


Further Reading


The Hamada Equation reconsidered
papers.ssrn.com [PDF]
… 1 Date: Presented at the American Finance Association annual meeting 1993, Revised March, 2014 … Page 4. THE HAMADA EQUATION RECONSIDERED, JAMAL MUNSHI, 2014 4 … We present a comparison of the two equations using numerical methods …

Portfolio analysis, market equilibrium and corporation financePortfolio analysis, market equilibrium and corporation finance
www.jstor.org [PDF]
… 1 Date: Presented at the American Finance Association annual meeting 1993, Revised March, 2014 … Page 4. THE HAMADA EQUATION RECONSIDERED, JAMAL MUNSHI, 2014 4 … We present a comparison of the two equations using numerical methods …

The theoretical relationship between systematic risk and financial (accounting) variablesThe theoretical relationship between systematic risk and financial (accounting) variables
www.jstor.org [PDF]
… 1 Date: Presented at the American Finance Association annual meeting 1993, Revised March, 2014 … Page 4. THE HAMADA EQUATION RECONSIDERED, JAMAL MUNSHI, 2014 4 … We present a comparison of the two equations using numerical methods …

Market equilibrium and corporation finance: Some issuesMarket equilibrium and corporation finance: Some issues
www.jstor.org [PDF]
… 1 Date: Presented at the American Finance Association annual meeting 1993, Revised March, 2014 … Page 4. THE HAMADA EQUATION RECONSIDERED, JAMAL MUNSHI, 2014 4 … We present a comparison of the two equations using numerical methods …

The effect of the firm's capital structure on the systematic risk of common stocksThe effect of the firm's capital structure on the systematic risk of common stocks
www.jstor.org [PDF]
… 1 Date: Presented at the American Finance Association annual meeting 1993, Revised March, 2014 … Page 4. THE HAMADA EQUATION RECONSIDERED, JAMAL MUNSHI, 2014 4 … We present a comparison of the two equations using numerical methods …

Contingent claim pricing using probability distortion operators: methods from insurance risk pricing and their relationship to financial theoryContingent claim pricing using probability distortion operators: methods from insurance risk pricing and their relationship to financial theory
www.tandfonline.com [PDF]
… 1 Date: Presented at the American Finance Association annual meeting 1993, Revised March, 2014 … Page 4. THE HAMADA EQUATION RECONSIDERED, JAMAL MUNSHI, 2014 4 … We present a comparison of the two equations using numerical methods …

Hamada's equation, the Sarbanes‐Oxley Act of 2002 and the UK Companies Act of 2006Hamada's equation, the Sarbanes‐Oxley Act of 2002 and the UK Companies Act of 2006
www.emerald.com [PDF]
… 1 Date: Presented at the American Finance Association annual meeting 1993, Revised March, 2014 … Page 4. THE HAMADA EQUATION RECONSIDERED, JAMAL MUNSHI, 2014 4 … We present a comparison of the two equations using numerical methods …

Capital Flight, North‐South Lending, and Stages of Economic DevelopmentCapital Flight, North‐South Lending, and Stages of Economic Development
onlinelibrary.wiley.com [PDF]
… 1 Date: Presented at the American Finance Association annual meeting 1993, Revised March, 2014 … Page 4. THE HAMADA EQUATION RECONSIDERED, JAMAL MUNSHI, 2014 4 … We present a comparison of the two equations using numerical methods …

The brain drain, international integration of markets for professionals and unemployment: a theoretical analysisThe brain drain, international integration of markets for professionals and unemployment: a theoretical analysis
www.sciencedirect.com [PDF]
… 1 Date: Presented at the American Finance Association annual meeting 1993, Revised March, 2014 … Page 4. THE HAMADA EQUATION RECONSIDERED, JAMAL MUNSHI, 2014 4 … We present a comparison of the two equations using numerical methods …



Q&A About Hamada Equation


Why would you use this formula when making investment decisions?

This formula allows investors to make more informed decisions about stocks they want to invest in. It also allows them to avoid potential risks associated with investing in certain stocks.

What is the Hamada equation?

The Hamada Equation is a fundamental analysis method of analyzing a firm's costs of capital as it uses additional financial leverage, and how that relates to the overall riskiness of the firm.

What is the Hamada Equation?

The Hamada Equation is an equation that helps investors determine the future direction of a stock.

What are some characteristics of stocks that can be determined by using this formula?

Some characteristics include momentum, volatility and trend strength.

Who created the Hamada Equation?

Dr. Kenichi Hamada created this equation.

How do you use this information in your investment decisions?

You would take into account that additional financial leverage increases its overall riskiness.

How does this type of leverage affect a company's cost of capital?

Additional financial leverage increases its overall riskiness.

How does the Hamada Equation work?

The formula uses price, volume and time to predict whether a stock will go up or down in value.

What does the equation summarize?

The equation summarizes the effects this type of leverage has on a firm's cost of capital (over and above the cost of capital as if the firm had no debt).