A New And Better Way To Measure The Cost Of Equity Capital For Small Closely Held Firms

Abstract

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-family: "Times New Roman","serif"; font-size: 10pt;">The purpose of this paper is to explore the theoretical structure that underlies the valuation process for small closely held firms.<span style="mso-spacerun: yes;">  </span>Specifically, cost of capital estimate methods which appear in the current literature are examined, and a theoretically correct and simple method to measure cost of equity capital for privately held companies is offered.<span style="mso-spacerun: yes;">  </span></span></p>

Rendimiento mínimo del inversor-propietario. El caso de la empresa pyme familiar

“…Alonso-Cañadas & Rojo Ramirez, 2011). Sin embargo, los inversorespropietarios de las Pymes pueden tener comportamientos ajenos a los propios del mercado (Boyer & Roth, 1976) y estimar el R Min ha de tener en cuenta aspectos que generalmente difieren en relación con las empresas cotizadas, como son la propia forma de financiación o el grado de control (Boudreaux et al, 2011). En particular, resulta de interés diferenciar entre inversores económicos de riesgo e inversores financieros de riesgo (Rojo-Ramírez, 2013; 2014) a la hora de comprender más adecuadamente el cálculo del R Min .…”

Estimating the Cost of Equity Using a Mining Build-up Model

“…Analysts have, for example, estimated the equity rate of return using build-up approaches in small businesses (Boudreaux et al, 2011). For small businesses that are not listed on the stock market, it can thus be an alternative to income methods.…”

“…The models are based on adding risk factors to the base created by a risk-free rate. According to Boudreaux et al (2011), build-up models start with a risk-free rate. Next, one or more factors based on the risk of the equity instrument are added (Boudreaux et al, 2011).…”

“…According to Boudreaux et al (2011), build-up models start with a risk-free rate. Next, one or more factors based on the risk of the equity instrument are added (Boudreaux et al, 2011). Also, the model by Sorin (2009) involves a risk-free rate (R f ) and other risk premiums: market risk premium (RP m ), RP s represents size premium, and RP u stands for unsystematic specific risk (Sorin, 2009).…”

“…They use the following premiums: R f -risk-free rate, RP m -equity risk premium for market (general market equity risk premium), RP s -size premium, Rp u -specific company premium (stands for unsystematic risk), Rp i -country risk premium (international investing), and O -other adjustments. Summing-up these extras, the expected equity return, or the cost of equity capital (Ke) are achieved (Boudreaux et al, 2011).…”