Asymmetry and the Cost of Capital

19 Pages Posted: 14 Mar 2011

See all articles by Javier García-Sánchez

Javier García-Sánchez

IAE Bussines School - Universidad Austral

Lorenzo A. Preve

IAE Business School, Universidad Austral

Virginia Sarria-Allende

IAE Business School - Universidad Austral

Date Written: December 13, 2010

Abstract

The expected cost of capital is a crucial component for most of the topics in corporate finance. Unfortunately in the presence of risky debt, it is systematically overestimated. This bias is increasing in leverage and the volatility of cash flows. We show the existence of the bias and assess its size. We finally propose a novel methodology to obtain a direct unbiased estimation of the expected return on assets. This method avoids the computational error that is obtained from the estimation of the individual components.

Keywords: Cost of Capital, Cost of Debt, Weighted Average Cost of Capital, Leverage

JEL Classification: G31, G32

Suggested Citation

García-Sánchez, Javier and Preve, Lorenzo A. and Sarria-Allende, Virginia, Asymmetry and the Cost of Capital (December 13, 2010). Available at SSRN: https://ssrn.com/abstract=1783576 or http://dx.doi.org/10.2139/ssrn.1783576

Javier García-Sánchez (Contact Author)

IAE Bussines School - Universidad Austral ( email )

Mariano Acosta s/n
y Ruta 8
Buenos Aires, Buenos Aires B1629
Argentina
+54(2322) 48-1000 (Phone)
+54(2322) 48-1050 (Fax)

HOME PAGE: http://www.iae.edu.ar

Lorenzo A. Preve

IAE Business School, Universidad Austral ( email )

Mariano Acosta s/n y Ruta 8
CCN°49
Pilar, Buenos Aires 1629
Argentina
+54(2322) 48-1055 (Phone)

HOME PAGE: http://www.iae.edu.ar/LPreve

Virginia Sarria-Allende

IAE Business School - Universidad Austral ( email )

Buenos Aires
Argentina

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
125
Abstract Views
1,008
Rank
472,397
PlumX Metrics