Cost of capital adjusted for governance risk through a multiplicative model of expected returns

Rodolfo Apreda

No 383, CEMA Working Papers: Serie Documentos de Trabajo. from Universidad del CEMA

Abstract: This paper sets forth another contribution to the long standing debate over cost of capital, firstly by introducing a multiplicative model that translates the inner structure of the weighted average cost of capital rate and, secondly, adjusting such rate for governance risk. The conventional wisdom states that the cost of capital may be figured out by means of a weighted average of debt and capital. But this is a linear approximation only, which may bring about miscalculations, whereas the multiplicative model not only takes account of that linear approximation but also the joint outcome of expected costs of debt and stock, and their proportions in the capital structure. And finally, we factor into the cost of capital expression a rate of governance risk.

Keywords: cost of capital; governance risk; weighted average cost of capital; governance index; multiplicative model of returns (search for similar items in EconPapers)
JEL-codes: G30 G32 G34 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2008-11
New Economics Papers: this item is included in nep-bec, nep-cfn and nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:cem:doctra:383

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