Unlevered Beta Calculator (Hamada Equation)
Unlever a company’s equity beta with the Hamada equation to get its asset beta, then relever it at a target debt-to-equity ratio and see the CAPM cost of equity before and after.
How it works
Hamada: β_unlevered = β_levered ÷ [1 + (1 − t) × D/E] · β_relevered = β_unlevered × [1 + (1 − t) × D/E target] · cost of equity = Rf + β × equity risk premium
A company’s observed (levered) beta mixes two risks: the business risk of its operations and the financial risk added by debt. Robert Hamada’s 1972 equation strips out the debt effect, assuming debt is riskless and interest is tax-deductible, to give the unlevered or asset beta. Analysts use it to value private companies or new projects: unlever the betas of comparable listed firms, average them, then relever at the target company’s capital structure before plugging the beta into CAPM and WACC. For highly indebted firms, versions that give debt its own beta are more accurate.
Worked example
A listed peer has an equity beta of 1.20, debt equal to 50% of equity and a 25% tax rate. Its unlevered beta is 1.20 ÷ (1 + 0.75 × 0.50) = 1.20 ÷ 1.375 = 0.8727. Relevered at a target D/E of 80%: 0.8727 × (1 + 0.75 × 0.80) = 1.3964. With a 4% risk-free rate and 5.5% equity risk premium the cost of equity rises from 10.60% to 11.68%.
Sources: Hamada (1972) — The Effect of the Firm’s Capital Structure on the Systematic Risk of Common Stocks, Journal of Finance · Aswath Damodaran (NYU Stern) — Levered and unlevered betas by industry
Frequently asked questions
Why unlever and relever beta?
Because comparable companies carry different amounts of debt. Unlevering removes each one’s financial risk so their business risk can be compared and averaged; relevering adds back the financial risk of the company you are valuing.
Should D/E be in market or book values?
Market values are preferred — market value of equity and, where available, market value of debt — because beta is measured on market prices.
What tax rate should I use?
The marginal tax rate at which interest is deducted. If the company pays no tax (for example because of losses), use 0%.
What is the difference between Hamada and the practitioners’ method?
The practitioners’ formula, β_U = β_L ÷ (1 + D/E), ignores the tax shield and gives a slightly lower unlevered beta. Hamada includes the (1 − t) factor; it is the standard textbook version.
Related calculators
Educational estimate, not investment, trading or tax advice. Brokers, exchanges and data providers use their own conventions, fees and figures — confirm with your broker, the exchange’s documentation or a licensed adviser before acting.