Explain Hamada Equation and also calculate Hamada coefficient using following information. A company has a debt to equity ratio of 0.65 : 1.00, a tax rate of 35% and an unlevered beta of 0.80.

Hamada Equation: The Hamada Equation is a financial formula used to quantify the effect of financial leverage on a company's beta. It helps in analyzing a firm's cost of capital by showing how the beta of a leveraged firm (βL) is related to the beta of an unleveraged firm (βU), considering the company's debt-to-equity ratio and tax rate. It draws upon the Modigliani-Miller (MM) theorem on capital structure, particularly the version with corporate taxes. The equation essentially states that as a company takes on more debt (increases financial leverage), its equity beta (and thus its cost of equity) will increase, reflecting the higher financial risk borne by equity holders. The higher the beta, the higher the risk associated with the firm. The formula for the Hamada Equation is: βL = βU [1 + (1 - t) (D/E)] Where: βL = Levered Beta (beta of the company with debt) βU = Unlevered Beta (beta of the company without debt, or asset beta) t = Corporate Tax Rate D/E = Debt-to-Equity Ratio Calculation of Hamada Coefficient (Levered Beta): Given Information: Debt to Equity Ratio (D/E) = 0.65 : 1.00 = 0.65 Tax Rate (t) = 35% = 0.35 Unlevered Beta (βU) = 0.80 Using the Hamada Equation: βL = βU [1 + (1 - t) (D/E)] βL = 0.80 [1 + (1 - 0.35) (0.65)] βL = 0.80 [1 + (0.65) (0.65)] βL = 0.80 [1 + 0.4225] βL = 0.80 [1.4225] βL = 1.138 Interpretation: The calculated leveraged beta (Hamada coefficient) is 1.138. This means that the financial leverage of the company increases the overall risk by the beta amount of (1.138 - 0.80) = 0.338. Therefore, as the beta of the coefficient rises, the associated risk of having higher debt also rises, making the equity more volatile and demanding a higher return from investors.