Worked example: a comp has a levered beta of 1.20, D/E of 0.50, and a 25% tax rate. Unlever it, then relever at a target D/E of 0.80 and compute the cost of equity with a 4% risk-free rate and 5% ERP.

Step 1 - unlever: Unlevered beta = 1.20 / [1 + (1 - 0.25) x 0.50] = 1.20 / [1 + 0.375] = 1.20 / 1.375 = 0.873. Step 2 - relever at the target's structure: Levered beta = 0.873 x [1 + 0.75 x 0.80] = 0.873 x 1.60 = 1.40. Step 3 - CAPM: Ke = 4% + 1.40 x 5% = 4% + 7.0% = 11.0%. In practice you would unlever a full comp set, take the median unlevered beta, then relever - but the mechanics per comp are exactly these three steps using the Hamada formula.