Unlevered Beta Calculator — Asset Beta (Hamada Equation)

Formula

How this is calculated

A company's observed equity beta (βL) reflects two layers of risk: operating risk from the business itself, and financial risk introduced by debt in the capital structure. The Hamada equation (1972) disentangles these by adjusting for the tax shield on interest and the debt-to-equity ratio. The result, unlevered beta (βU or asset beta), represents pure business risk as if the firm were entirely equity-financed — comparable across companies regardless of how they are funded.

Unlevering beta is essential in DCF valuation when you benchmark against comparable companies with different capital structures. The procedure is: (1) collect the equity betas of comparable companies, (2) unlever each using their own D/E and tax rates, (3) average the unlevered betas to get the industry asset beta, (4) re-lever at the target company's D/E using βL = βU × [1 + (1 − t) × D/E], and (5) use that βL in CAPM to estimate cost of equity.

Assumptions and limitations: the Hamada equation assumes debt is permanent (maximising the interest tax shield), that the firm's debt is risk-free, and that the firm rebalances its capital structure continuously to maintain a constant D/E. For firms with risky debt or a target debt level expressed in dollar terms rather than market-value ratio, practitioners use the Miles–Ezzell or Harris–Pringle formulas instead. Tax rates used should be the marginal corporate rate; effective (average) rates understate the shield.