An Analyst Constructs a Privately Held Firm's Cost of Equity

question 122

Short Answer

An analyst constructs a privately held firm's cost of equity using the "build-up" method. The 10-year Treasury bond rate is 4% and the historical equity risk premium for the S&P 500 stock index is 5.5%. The risk premium associated with firms of this size is 3.8% and for firms within this industry is 2.4%. Based on due diligence, the analyst estimates the risk premium specific to this firm to be 2.5%. What is the firm's cost of equity based on this information?

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Definitions:

U.S.-Based NGOs

Non-governmental organizations headquartered in the United States that operate on both a domestic and international level, focusing on various issues such as humanitarian aid, environment, and human rights.

Global Presence

The extent to which a company or brand operates in multiple countries around the world and is recognized and available across international markets.

Few Volunteers

A situation where there is a shortage of individuals willing to offer their time and services for a cause or organization without financial compensation.

Nonprofit Organizations

Entities that operate for a collective, public or social benefit, rather than to generate profit for owners or investors.