When Estimating the Cost of Capital (Part I of III) In this paper, published in three parts with NACVA’s QuickRead, Roger Grabowski reviews the size effect, potential reasons why one observes the size effect, and correct common misconceptions and address criticisms of the Size Premia (SP). Throughout this paper, the author shows that using a pure market factor as the sole risk factor in estimating the expected return provide an incomplete estimate. For the last four decades, research has shown that adjustments to the CAPM are required. Here, Roger Grabowski addresses some of the criticism to the theoretical basis of…
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The magnitude of the equity risk premium, or required return in excess of the risk-free rate, is a perennial question for valuation specialists. Travis Harms, Mercer Capital’s Financial Reporting Valuation Group lead, explains that the aggregate equity premium is typically broken into two pieces: 1) a market risk premium, and 2) a size premium. To read the full article in Mercer Capital’s Financial Reporting Blog, click: A Market Participant Perspective on the Size Premium. This article is republished from Mercer Capital’s Financial Reporting Blog. It is reprinted with permission. To subscribe to the blog, visit: http://mercercapital.com/category/financialreportingblog/.