The Hamada equation allows the firm to: A. Solve for a company’s total risk B.Adjust the...

The Hamada equation allows the firm to:

A. Solve for a company’s total risk

B.Adjust the beta of a pure- play firm for its use of debit financing

C. Estimate it’s asset beta

D.Both a and C are correct

Expert Solution

Answer (C) The hamada equation is a fundamental analysis method of analysing a firm's cost of capital as it uses additional financial leverage and how that relates to over riskiness of the form the measures to summarise the effects of type of leverage has informed cost of capital and the above cost of capital as if the firm has no debt.

The ignition Roza ponder theorem on capital structure and extends and analysis to quantify the effects of financial leverage on a form beta is a measure of volatility or systematic risk relative to the overall market the equation shows how beta of a firm changes with the leverage the higher the beta Coefficient the higher the risk associated with the form it has provided useful in several of Finance including capital structuring portfolio management at risk management the formula is commonly taught in MBA corporate finance and valuation classes it is used to determine the cost of capital of leverage form based on the cost of capital of comparable forms the comparable forms would be the ones having similar business risk and thus similar unlevered beta on the form of interest.

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