what does the hamada equation tell you 
the 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 systemic risk relative to the overall market the hamada equation then shows how the beta of a firm changes with leverage the higher the beta coefficient the higher the risk associated with the firm example of the hamada equationa firm has a debt to equity ratio of 0 60 a tax rate of 33 and an unlevered beta of 0 75 the hamada coefficient would be 0 75 1 1 0 33 0 60 or 1 05 this means that financial leverage for this firm increases the overall risk by a beta amount of 0 30 which is 1 05 less 0 75 or 40 0 3 0 75 or consider retailer target nyse tgt which has a current unlevered beta of 0 82 its debt to equity ratio is 1 05 and the effective annual tax rate is 20 thus the hamada coefficient is 0 99 or 0 82 1 1 0 2 0 26 thus leverage for a firm increases the beta amount by 0 17 or 21 the difference between hamada equation and weighted average cost of capital wacc the hamada equation is part of the weighted average cost of capital wacc the wacc involves unlevering the beta to relever it to find an ideal capital structure the act of relevering the beta is the hamada equation limitations of using the hamada equationthe hamada equation is used in finding optimal capital structures yet the equation doesn t include default risk while there have been modifications to account for such a risk they still lack a robust way to incorporate credit spreads and the risk of default to gain a better understanding of how to use the hamada equation it s useful to understand what the beta is and how to calculate it 