COST OF CAPITAL ADJUSTED FOR GOVERNANCE RISK THROUGH A MULTIPLICATIVE MODEL OF EXPECTED RETURNS

Rodolfo Apreda
2011 Risk Governance and Control: Financial Markets & Institutions  
Suggested Citation: Apreda, Rodolfo (2008) : Cost of capital adjusted for governance risk through a multiplicative model of expected returns, Serie Documentos de Trabajo, Universidad del CEMA: Área: finanzas, No. 383 This Version is available at: http://hdl.handle.net/10419/84376 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder
more » ... iche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. 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. JEL codes: G30, G32, G34 Key words: cost of capital; governance risk; weighted average cost of capital; governance index; multiplicative model of returns Institutional Disclaimer Statements and opinions conveyed in this paper are attributable to the author only, while the University of Cema disclaims any responsibility for them.
doi:10.22495/rgcv1i1art1 fatcat:llygl6rfdnagne5vbnlnkwrgpa