THE COST OF EQUITY OF TOO BIG TO FAIL BANKS (TBTF). A COMPARATIVE STUDY BETWEEN CAPM, THE METHOD BASED ON THE RECIPROCAL OF P/E MULTIPLE AND ACTUARIAL METHOD
The cost of equity is typically defined as the expected return that investors require to purchase common stock in a firm. It is therefore an important input for bank management when raising capital and making investment decisions and for investors when they value equity securities and construct their portfolios. The Capital Assets Pricing Model (CAPM) method remains the one most commonly used by practitioners and financial advisers to estimate a firm’s cost of equity, as shown in surveys by Brunner et al (1998) and Graham and Harvey (2001).