In this paper, we present a model that demonstrates the e®ect of debt on cost of capital and value in the case of banking ¯rms. Using a static partial equilibrium setting, both in a steady state and steady growth scenario, we derive a bank-speci¯c valuation metric which separately attributes value to assets and debt cash °ows in the form of a liquidity premium and taxshield. We run our model on a sample of the largest 26 European banks from 2003 to 2016 ¯nding that the value contribution of debt bene¯ts to enterprise value is large and persistent. Further from our model, we derived an implied cost of capital (ICC) measure ¯nding consistent results with capital asset pricing model (CAPM). The theoretical framework we present is helpful to address bank debt bene¯ts valuation and to reconcile equity and asset side approaches.

LEVERAGE, COST OF CAPITAL AND BANK VALUATION

BELTRAME, FEDERICO;
2018

Abstract

In this paper, we present a model that demonstrates the e®ect of debt on cost of capital and value in the case of banking ¯rms. Using a static partial equilibrium setting, both in a steady state and steady growth scenario, we derive a bank-speci¯c valuation metric which separately attributes value to assets and debt cash °ows in the form of a liquidity premium and taxshield. We run our model on a sample of the largest 26 European banks from 2003 to 2016 ¯nding that the value contribution of debt bene¯ts to enterprise value is large and persistent. Further from our model, we derived an implied cost of capital (ICC) measure ¯nding consistent results with capital asset pricing model (CAPM). The theoretical framework we present is helpful to address bank debt bene¯ts valuation and to reconcile equity and asset side approaches.
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/10278/3711335
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