J Int Financ Manage Account. 2019;00:1–27. | 1 wileyonlinelibrary.com/journal/jifm DOI: 10.1111/jifm.12109 ORIGINAL ARTICLE After Modigliani, Miller, and Hamada: A new way to estimate cost of capital Roland Clère * © 2019 John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. *Roland Clère is an appraiser and financial consultant, and a member of the SFEV (Société française des évaluateurs, the French Association of Appraisers). BM&A, Paris, France Correspondence Roland Clère, BM&A, Paris, France. Email: r.clere@bma-paris.com Abstract In this article, we discuss the impact of financial debt on shareholder value using a new approach that aims: (a) to ex- plain the effect that leverage from debt has on a stock’s sys- tematic risk, or what we shall call here “the systematic cost of leverage,” and (b) to account for default risk in the cost of equity, or what we shall call here “the cost of default.” Our assessment of systematic risk is based on a stochastic ap- proach that is materially different from the one proposed by Hamada: the risk premium remunerates the investor for the probability of equity (expressed as market value) generating a return below that of the risk‐free rate. Furthermore, the approach we use to account for default risk is derived from reduced‐form models, but in this case, (a) we use real prob- abilities of default and not risk‐neutral probabilities, and (b) we extend the approach to stocks. KEYWORDS adjusted present value, APV, cost of default, cost of equity, cost of leverage, credit risk, credit spread, debt leverage, default premium, default risk, default spread, levered beta, Modigliani and Miller, Pablo Fernandez, reduced‐form model, Robert Hamada, Shareholder value, systematic risk, tax shield