The Cost of Capital for Financial Firms

2006 ◽  
Vol 12 (1) ◽  
pp. 229-283 ◽  
Author(s):  
C. J. Exley ◽  
A. D. Smith
Keyword(s):  
Capital Structure ◽  
Performance Measurement ◽  
Classical Theory ◽  
Cost Of Capital ◽  
Financial Firms ◽  
Product Pricing ◽  
Insurance Firms ◽  
The Cost ◽  
Special Case

ABSTRACTMost businesses have assets financed by capital providers. The cost of capital is a measure of the returns required by those capital providers. Its main use is to set a target for the profits, which must be achieved on the firm's assets in order to satisfy equity and bond holders.This paper describes the classical theory of the cost of capital, and then applies it to the special case of banking and insurance firms. We develop implications for product pricing, performance measurement and capital structure optimisation.

Confirming Anomalies

2021 ◽  
pp. 2150024
Author(s):  
Peter Chinloy ◽  
Matthew Imes
Keyword(s):  
Capital Structure ◽  
Stock Returns ◽  
Cost Of Capital ◽  
Simultaneous Equations ◽  
Second Stage ◽  
Predicted Values ◽  
The Cost ◽  
Over Time ◽  
Identification Strategy

A procedure confirms whether a return-factor correlation is anomalous or results from endogenous simultaneous-equations bias. The identification strategy sorts the cost of capital components for instruments. In the first stage, the initially found factors are regressed on cost instruments. In the second stage, a confirmed anomaly has predicted value significant in returns and exogenous. Taxes, depreciation and capital structure are strong instruments, affecting 1980–2017 quarterly U.S. stock returns. Size, value and profitability decisions are significant in instruments. Returns increase in fitted profits, but not small size. Actual and predicted values have weaker correlation with returns over time.

Capital Structure and the Cost of Capital for Untaxed Firms: The Case of REITs

1990 ◽  
Vol 18 (1) ◽  
pp. 22-39 ◽  
Author(s):  
Brian A. Marts ◽  
Fayez A. Elayan
Keyword(s):  
Capital Structure ◽  
Cost Of Capital ◽  
The Cost

scholarly journals Do Strict Capital Requirements Raise the Cost of Capital? Bank Regulation, Capital Structure, and the Low-Risk Anomaly

2015 ◽  
Vol 105 (5) ◽  
pp. 315-320 ◽  
Author(s):  
Malcolm Baker ◽  
Jeffrey Wurgler
Keyword(s):  
Capital Structure ◽  
Stock Returns ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Capital Requirements ◽  
Structure Theory ◽  
Treasury Bills ◽  
Percentage Point Increase ◽  
Point Increase ◽  
The Cost

Traditional capital structure theory predicts that reducing banks' leverage reduces the risk and cost of equity but does not change the weighted average cost of capital, and thus the rates for borrowers. We confirm that the equity of better-capitalized banks has lower beta and idiosyncratic risk. However, over the last 40 years, lower risk banks have not had lower costs of equity (lower stock returns), consistent with a stock market anomaly previously documented in other samples. A calibration suggests that a binding ten percentage point increase in Tier 1 capital to risk-weighted assets could double banks' risk premia over Treasury bills.

The Economics of New Drugs: Can We Afford to Make Progress in a Common Disease?

2013 ◽  
pp. e126-e130
Author(s):  
Bradford R. Hirsch ◽  
Kevin A. Schulman
Keyword(s):  
Drug Development ◽  
Cost Of Capital ◽  
New Drugs ◽  
Common Disease ◽  
Target Market ◽  
Sustainable Business ◽  
Product Pricing ◽  
Grant Support ◽  
To Come ◽  
The Cost

The concept of personalized medicine is beginning to come to fruition, but the cost of drug development is untenable today. To identify new initiatives that would support a more sustainable business model, the economics of drug development are analyzed, including the cost of drug development, cost of capital, target market size, returns to innovators at the product and firm levels, and, finally, product pricing. We argue that a quick fix is not available. Instead, a rethinking of the entire pharmaceutical development process is needed from the way that clinical trials are conducted, to the role of biomarkers in segmenting markets, to the use of grant support, and conditional approval to decrease the cost of capital. In aggregate, the opportunities abound.

scholarly journals Analysis of the structure and cost of capital in mining enterprises

2017 ◽  
Vol 33 (1) ◽  
pp. 77-92 ◽  
Author(s):  
Robert Ranosz
Keyword(s):  
Capital Structure ◽  
Cost Of Capital ◽  
Cost Of Debt ◽  
Cost Of Equity ◽  
Mining Company ◽  
Optimal Capital Structure ◽  
Mining Companies ◽  
Debt Capital ◽  
Capital Funding ◽  
The Cost

AbstractThis article focuses on the analysis of the structure and cost of capital in mining companies. Proper selection of appropriate levels of equity and debt capital funding of investment has a significant impact on its value. Thus, to maximize the value of the company, the capital structure of the company should be composed to minimize the weighted average cost of capital. T he objective of the article is to present the capital structure of selected Polish and world’s mining companies and estimate their cost of equity and debt capital. In the paper the optimal capital structure for the Polish mining company (KGHM SA) was also estimated. It was assumed that both Polish and world’s mining companies, have no debt exceeding 45% in the financing structure. For the most of analyzed cases, the level of financing with debt capital is in the range between 10% and 35%. T he cost of equity exceeds the cost of debt capital and is in the range between 8% and 20%, while the cost of debt capital reaches the range between 1.9% and 12%. T he analysis of the optimal capital structure determining, performed for the selected mining company, showed that debt capital funding for the company should be in the range between 5.7% and 7.4%.

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

2011 ◽  
Vol 1 (1) ◽  
pp. 9-18 ◽  
Author(s):  
Rodolfo Apreda
Keyword(s):  
Capital Structure ◽  
Linear Approximation ◽  
Average Cost ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Multiplicative Model ◽  
Conventional Wisdom ◽  
Expected Returns ◽  
The Cost ◽  
Governance Risk

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.

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