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Hamada Equation: Hartman's Unlevered Beta

Hartman Motors has $18 million in total assets, financed with $6 million in debt and $12 million in equity. Its current beta is 1.3 and its tax rate is 35%. To calculate Hartman's unlevered beta using the Hamada equation, the student: 1) Calculated the debt-to-equity ratio of 0.5 by dividing total debt by total equity 2) Plugged the given values of current beta (1.3), tax rate (35%), and debt-to-equity ratio (0.5) into the Hamada equation 3) Solved for the unlevered beta, determining it to be 0.9811, which is rounded to 0

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Muhammad Adil
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312 views2 pages

Hamada Equation: Hartman's Unlevered Beta

Hartman Motors has $18 million in total assets, financed with $6 million in debt and $12 million in equity. Its current beta is 1.3 and its tax rate is 35%. To calculate Hartman's unlevered beta using the Hamada equation, the student: 1) Calculated the debt-to-equity ratio of 0.5 by dividing total debt by total equity 2) Plugged the given values of current beta (1.3), tax rate (35%), and debt-to-equity ratio (0.5) into the Hamada equation 3) Solved for the unlevered beta, determining it to be 0.9811, which is rounded to 0

Uploaded by

Muhammad Adil
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as XLSX, PDF, TXT or read online on Scribd
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Financial Management – Quiz 02

Name: Muhammad Adil Student ID: 63601

Q. Hartman Motors has $18 million in assets, which were financed with
$6 million of debt and $12 million in equity. Hartman’s beta is currently 1.3, and its tax rate
is 35%. Use the Hamada equation to find Hartman’s unlevered beta, bU.

Solution:

1 The Hamada equation is posted below

bL = bu[1 + (1 -T)(D/E)

We know that the D/E is the measure of financial leverage which we can find by dividing the total debt ($6m) by th

So D/E = 6,000,000/12,000,000 = 1/2

2 The problem also gives us the firm's current beta or bI which is 1.3, as well ns the tax rate or T which is 35%.

With this in mind we can plug in all the variables to solve for bu and find the firm's unlevered beta

1.3 = bu[l + (1-0.35)(1/2)

1.3 = -bu(1+ 1.325)

bu = 1.3/1.325

bu = 0.9811

Using the Hamada equation, Hartman's unlevered beta is 0.98.


the total debt ($6m) by the total equity ($12m).

e or T which is 35%.

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