What is the Hamada Equation in terms of Capital Structure ?

The Hamada equation draws upon the Modigliani-Miller theorem on capital structure and extends an analysis to quantify the effect of financial leverage on a firm. Beta is a measure of volatility or systematic risk relative to the overall market. The Hamada equation shows how the Beta of a firm changes with leverage. The higher the Beta coefficient, the higher the risk associated with the firm. The significant aspects of the Hamada equation are as under: The Hamada equation is a method of analyzing a firm's cost of capital as it uses additional financial leverage. It draws upon the Modigliani-Miller theorem on capital structure. The higher the Hamada equation Beta coefficient, the higher the risk associated with the firm. Formula for Hamada equation: B L B U * [1 + (1 - T) * (D/E)] B L = Levered Beta. B U = Unlevered Beta (Market risk without the impact of debt) T = Tax rate. D/E = Debt to equity ratio. (Measure of financial leverage)