The Hamada Equation

A big deal for companies is to decide whether to finance their company with debt (loans) or equity (stock). Too much debt can cause risk to the shareholders, but it offers tax advantages. Its complicated stuff, but there are equations to help.

Robert Hamada, in 1969 wrote a paper called "Portfolio Analysis, Market Equilibrium, and Corporation Finance" in which he came up with the Hamada Equation! This is exciting stuff.
First, you should know what a "Beta" is. According to "Wall Street Words" a Beta is:

A mathematical measure of the sensitivity of rates of return on a portfolio or a given stock compared with rates of return on the market as a whole. A high beta (greater than 1.0) indicates moderate or high price volatility. A beta of 1.5 forecasts a 1.5% change in the return on an asset for every 1% change in the return on the market. High-beta stocks are best to own in a strong bull market but are worst to own in a bear market.

Now, the Hamada equation formulated a way to show that the beta increases with financial leverage (debt financing rather than equity financing).
It is:
Bl=Bu [1+(1-t)(d/e)
where:
Bl=current beta
Bu=unleveraged beta (what would the beta be without the debt)
D/E debt to equity ratio

You can insert the unlevered beta into other equations to find out what the betas would be for different debt levels. You can use this to help you decide if you should use debt or equity to finance your business.

http://upload.wikimedia.org/wikipedia/commons/thumb/b/b2/Beta_uc_lc.svg/800px-Beta_uc_lc.svg.png

Financial Woes!

Q. What if we have a great depression?

A. We may have to raise rats for meat, in our DRYERS!

I don't know how to skin a rat, what if I make a deal with you: you skin the rats and I let you eat one that I raised

(P.S. this was a terrible nightmare that I had. I am glad to know that if it comes down to it, I will eat a rat though, and not die. Which is not to be take for granted).

r=r*+ip+drp+lp+mrp

Here is a calculation for interest rates!
r=nominal rate (stated rate)
r*=risk free rate (like the t-bill)
ip=inflation premium
drp=default risk premium
lp=liquidity premium (the risk that it will be hard to liquidate)
mrp=maturity risk premium (the risk that you can't reinvest the money at the same rate as you can now).

r* is easy to calculate, you can peg it to the treasury

Liquidity and MRP are hard to calculate because they to do with the future

Am I posting too many videos now?

I have never seen this before today! I guess this is what we have to look forward to. Unless Obama saves us. Saaaaaaaaave usssss! Mann, wer haette das gedacht Dass es einmal soweit kommt indeed!

I am supposed to be doing homework now

I could survive for 51 seconds chained to a bunk bed with a velociraptor

virtual kidnapping

My brother was virtually kidnapped this weekend! Someone called our family claiming to be my bro, it sounded like him but drunk. He said he was arrested and needed 10 grand to get out of Mexican jail! It took us all day to figure out it was a scam. That day sucked.

another movie too sad to see

I forgot about this movie, Lilya 4-ever. It is about how someone gets trafficked out of the former Soviet Union for prostitution. This is a strange clip, its the part of the movie where this girl's mother leaves her. Its super sad...set to rap! I like it.