The Capital Return of an Unlisted Bank

Abstract

The problem to determine the capital cost, in general, is relatively simple, but not trivial. In the particular case of study, related to the capital of an unlisted bank, it is a bit less. In the use of the Capital Asset Pricing Model equation there is a series of obstacles that make its application not so immediate, so the non-triviality of the model. The goal of this work is to use the CAPM equation to give a value to the capital cost invested in an unlisted bank, particularly in a credit cooperative bank. The biggest obstacle is given by the Beta determination that we intend to use, if we refer to unlisted companies, it becomes difficult to determine this coefficient. With the present work we have followed a first step that connects each listed bank returns with the average market returns, market is composed by the listed banks portfolio, so we have obtained a Business Risk Index (BRI) related to these banks. We have started from this index to relevered it on the basis of each unlisted BCC financial structure. In this way we obtain Beta coefficient of this sample. Alternatively, it has been built a basket of unlisted bank returns of the same sector under analysis, thenrelating the returns of individual observed banks with the average returns provided by the banks observed market portfolio, we obtain the regression Beta. At the end we determine a final alternative to assess the Beta values by building a Business Risk Index (BRI) sector obtained from the BCC market. The analysis of the various alternatives used to determine the Beta values, leads to some interesting observations and considerations in the evaluation of the capital return invested in an unlisted bank.