Title: Capital structure, cost of funding and bank performance: a managerial compendium

Authors: Federico Beltrame

Addresses: University of Udine, Via Tomadini 30/A, Udine, Italy

Abstract: Using discounted cash flow (DCF) models and the internal rate of return (IRR) criterion, the paper conceptualises: 1) equity financing's stand-alone effect on banks' overall cost of capital, following Modigliani and Miller's (MM) (1963) and Miles and Ezzell's (ME) (1980) debt policies; 2) capital requirements' effect on bank performance. First, the simulations indicate that: 1) overall, leverage negatively influences weighted average cost of capital (WACC); 2) at the pre-tax WACC level, the value irrelevance principle is satisfied under the ME financial policy when the rating based cost of debt is used; 3) under the ME financial policy and high levels of risky debt the cost of funding (post-tax WACC calculated using the bank specific cost of debt) increases more than proportionally as equity increases. Second, with IRR fixed on a determined allocation of risk capital, additional requirements cause an increase in banks' performance with a higher franchise value net of taxes.

Keywords: banks; leverage; debt benefits; WACC; capital allocated.

DOI: 10.1504/IJMFA.2025.148906

International Journal of Managerial and Financial Accounting, 2025 Vol.17 No.4, pp.420 - 441

Received: 20 Jan 2024
Accepted: 28 Mar 2024
Published online: 02 Oct 2025 *

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