The Banks Cost of Capital: Theories and Empirical Evidence

Federico Beltrame and Daniele Previtali
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Federico Beltrame: University of Udine
Daniele Previtali: Luiss Guido Carli University

Chapter 5 in Valuing Banks, 2016, pp 111-153 from Palgrave Macmillan

Abstract: Abstract In this chapter, we discuss the methodologies used for cost of capital estimation in the banking industry. In particular, we first consider the generic treatment of the cost of equity calculation techniques that we divided into those methods quantifying the systematic risk premium and those measuring the total risk premium. The first aim of this chapter is to modify the Hamada (1972) formula excluding deposits value from a banks’ asset beta. Following this approach, we obtain a better measure with which to represent asset risk that is, additionally, independent from bank leverage. The second aim is to discuss the equity pricing methods that enable the quantification of the total risk (such as total beta and the implied cost of capital measures), in particular, adapting the CaRM to the banking industry. In order to better understand the applicability of the models, the chapter provides examples on listed and non-listed banks.

Keywords: Cash Flow; Total Asset; Credit Risk; Systematic Risk; Capital Asset Price Model (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:pal:pmschp:978-1-137-56142-8_5

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DOI: 10.1057/978-1-137-56142-8_5

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