Abstract: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 taxshield. 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 ente… Show more
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