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Describe the usage of the HAMADA model

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Describe the implementation of the HAMADA model.

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Solution Summary

The HAMADA model is described and compared to similar models used in order to determine the cost of equity. The solution provides calculations and examples to demonstrate the application of the model.

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The Hamada model is used in order to determine the cost of equity. It is different from Capital Assets Pricing Model that it's using the levered β.

The CAPM is represented by the equation: Ke = Rf + β (Km - Rf)
The Hamada equation is using the leveraged beta that equals to:
βl = βu (1 + (1 - Tx) * (D/E)
So, using Hamada model, the formula for the cost of equity is:
Ke = Rf + βu (Km - Rf) + βu (1 - Tx)*(D/E)*(Km - Rf)

Where, Rf - risk free rate
βu (Km - Rf) - business risk premium
βu (1 - ...

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