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Essay / Research Paper Abstract
Banks need to know their cost of capital; this includes the cost of equity. This 6 page paper looks at how the cost of equity can be calculated with the use of the capital asset pricing model (CAPM), considering the different components of the model and the way that they impact on the resulting cost of equity. The bibliography cites 10 sources.
Page Count:
6 pages (~225 words per page)
File: TS14_TEbankcapm.rtf
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Unformatted sample text from the term paper:
money around the economy, they also hold funds for the actors that spend and save money in the economy. There importance in undertaking these actions and the in creating and
maintaining economic stability has been emphasized over the last year with the credit crunch. When considered in this context the way a bank is managed and the issues such as
the cost of capital are highly important. Cost of capital calculations for a bank is more difficult than for many other industry organizations, and arguably it is more important
than in other areas of commerce (Zimmer and MaCauley, 1991; 34). In many areas there is not only a common sense requirement that banks need to make a profit,
but a legal requirement that they are covering their costs, as seen in the US with the Monetary Control Act of 1980, this controls Federal Reserve banks and stipulates that
services must be provided at a level where they cover all of the costs (Green et al, 2001; 2). The way that the cost of capital can be calculated
varies, in different areas and under differing regulations there may be requirements for various systems to be used, but one that may be easy for academic purposes as well as
practical is that of capital asset pricing model. This is a system of appraising the cost of capital within a firm where there is an assessment of the cost of
capital by comparing it to the market and allowing for the risk premium. Barnes and Lopez (2006; 1687) argue that CAPM is a good tool for estimating the cost of
equity within banks. This supports earlier work by Clare (1995; 1147). The theory is that there will be a specific return expected for any assets that are traded, such
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