NJ Business Valuation Accountant Explains Hamada's Equation

Hamada's equation, have you ever heard that before? Hamada's equation is extremely important, because what it enables you to do is take a company that has a lot of debt and unlever that debt, and see what the equity value of that company is. And you could compare it to other companies within the industry because different companies have different amounts of debt and I like to unlever that debt. I use this equation to unlever it.

And remember, what it's basically doing is taking a beta. When we have a beta, that's telling you the risk of the stock. If a beta's less than one, it's less risky than the stock market. If it's one, it trades in sequence with the stock market. If it's higher, it's more risky, it trades. So if the stock market goes up 100, that stock will go up 120.

But a lot of that effect could be because the company has a lot of debt. And so what I do is I take that beta, I unlever it using this equation, which is very simple once you figure it out. And then I have what's called an asset beta or equity beta. And then I can use that to figure out the value. It's just a great thing to use if you want to compare companies within an industry that have different debt levels. If you have any questions about the Hamada equation, feel free to give me an email at robert@rabcpafirm.com. And for any other questions regarding New Jersey business valuations, visit https://www.rabcpafirm.com/practices/business-valuations/.