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Describe the buildup method for estimating a small business’s cost of equity. What are the factors...

Describe the buildup method for estimating a small business’s cost of equity. What are the factors affecting the CCC estimate?

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Answer #1
  • Start with risk-free rate, e.g. yield of long-term US TBond
  • Add equity risk premium
  • Add small provately owned company size premium
  • Add sector premium
  • Add company specific risk premium

Calculation of equity discount rate uses following formula:

where Rf-risk free rate, Pe- equity premium, Ps-small company premium, Pi- industry specific premium, and Pc- firm speciifc premium.

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