TITLE:
Cost of Capital for Private Firms
AUTHORS:
Federico Beltrame, Luca Grassetti, Gianni Zorzi
KEYWORDS:
Size Premium, Cost of Capital, Default Risk, Private Firms
JOURNAL NAME:
Theoretical Economics Letters,
Vol.13 No.3,
June
30,
2023
ABSTRACT: This paper elaborates on a new default-based cost of
capital estimation for private-held
firms. We test the model’s ability to incorporate systematic risk and size premium. Results highlight a positive
and statistically significant effect of CAPM
expected return and size premiums on this novel cost of capital measure. Beyond the utility in practice for
private equity valuation, preliminary results are promising for
application on a larger cross-country sample.