Module II· Cost of Equity & CAPMIntermediate
Question
Worked example — Global Chemicals Corp: Rf 2.3%, β_relevered 1.15, ERP 6.0%, size premium 1.5%. Calculate the cost of equity.
Answer
Example — Global Chemicals Corp
Inputs:
- Rf: 2.3%
- β_relevered: 1.15
- ERP: 6.0%
- Size premium SP: 1.5%
Calculation:
```
CoE = Rf + β × ERP + SP
= 2.3% + 1.15 × 6.0% + 1.5%
= 2.3% + 6.9% + 1.5%
= 10.7%
```
Sanity check
10.7% is plausible for a mid-cap specialty-chemicals name — a little above the pure CAPM CoE because of the size premium. For a family-owned company you would add a +0.5–1% illiquidity premium, so 11.2–11.7%. A strategic (public) target would be more like 9–10%.
Deep diveShow more details
Pitch tip
In a valuation pitch, break the CoE down step by step — Rf, β, ERP, SP separately — it shows discipline and is easier to defend.