Leverage, Cost of Capital and Bank Valuation

20 Pages Posted: 2 May 2016 Last revised: 9 Oct 2019

See all articles by Federico Beltrame

Federico Beltrame

Università degli Studi di Udine

Stefano Caselli

Bocconi University - Department of Finance

Daniele Previtali

University of Naples Parthenope - Department of Management Studies and Quantitative Methods; LUISS Guido Carli University

Date Written: September 6, 2016

Abstract

In this paper we present a model that demonstrates the effect of debt on cost of capital and value for banks with risky assets. Using a static partial equilibrium setting, both in a steady state and steady growth scenario, we derive a bank- specific valuation metric which separately attributes value to assets and debt cash flows in the form of a liquidity premium and a tax-shield. The asset side model proposed does not require the assumption of stable capital structure, typical of the currently applied DCF equity side methods. Furthermore, the theoretical framework we present is helpful in reconciling asset and equity side approaches in banking.

Keywords: bank, capital structure, cost of capital, core deposits

JEL Classification: D58, G21, G31, G32

Suggested Citation

Beltrame, Federico and Caselli, Stefano and Previtali, Daniele, Leverage, Cost of Capital and Bank Valuation (September 6, 2016). Available at SSRN: https://ssrn.com/abstract=2770590 or http://dx.doi.org/10.2139/ssrn.2770590

Federico Beltrame (Contact Author)

Università degli Studi di Udine ( email )

Via Tarcisio Petracco, Palazzo antonini, 8
Udine, 33100
Italy

Stefano Caselli

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Daniele Previtali

University of Naples Parthenope - Department of Management Studies and Quantitative Methods ( email )

Via Generale Parisi, 13
Naples
Italy

LUISS Guido Carli University ( email )

Viale Romania 32
Rome, Roma 00197
Italy

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