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The Cost of Capital for Financial Firms

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  • Exley, C. J.
  • Smith, A. D.

Abstract

Most 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.

Suggested Citation

  • Exley, C. J. & Smith, A. D., 2006. "The Cost of Capital for Financial Firms," British Actuarial Journal, Cambridge University Press, vol. 12(1), pages 229-283, March.
    • Handle: RePEc:cup:bracjl:v:12:y:2006:i:01:p:229-283_00
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    Cited by:

    1. Naseem Ahamed & Nitya Nand Tripathi, 2023. "Financial Performance as a Determinant of The Cost of Capital: An Empirical Study on Listed Companies in India," Capital Markets Review, Malaysian Finance Association, vol. 31(2), pages 69-87.

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