Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/84376
Authors: 
Apreda, Rodolfo
Year of Publication: 
2008
Series/Report no.: 
Serie Documentos de Trabajo, Universidad del CEMA: Área: finanzas 383
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.
Subjects: 
cost of capital
governance risk
weighted average cost of capital
governance index
multiplicative model of returns
JEL: 
G30
G32
G34
Document Type: 
Working Paper

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