LEVERAGE, COST OF CAPITAL AND BANK VALUATION

In this paper, we present a model that demonstrates the e®ect of debt on cost of capital and value in the case of banking ̄rms. Using a static partial equilibrium setting, both in a steady state and steady growth scenario, we derive a bank-speci ̄c valuation metric which separately attributes value to assets and debt cash °ows in the form of a liquidity premium and tax- shield. We run our model on a sample of the largest 26 European banks from 2003 to 2016 ̄nding that the value contribution of debt bene ̄ts to enterprise value is large and persistent. Further from our model, we derived an implied cost of capital (ICC) measure ̄nding con- sistent results with capital asset pricing model (CAPM). The theoretical framework we present is helpful to address bank debt bene ̄ts valuation and to reconcile equity and asset side approaches.