Debt & finance

Cost of equity calculator using CAPM

The capital asset pricing model prices the return equity holders should demand for bearing market risk. For private businesses it is only the starting point — the premiums added afterwards usually matter more.

Inputs

Result

Cost of equity

23.4%

CAPM component
11.4%
Total private-company premiums
12%
Market risk contribution
7.2%
Implied earnings multiple (capitalised)
4.27x
  • Capitalisation multiple = 1 / (cost of equity − long-term growth). Document every premium you add.

How to use this calculator

  1. 1Enter the current risk-free rate (long government bond yield).
  2. 2Enter beta and the equity risk premium for your market.
  3. 3Add size, illiquidity and specific-company premiums.

CAPM and the build-up method

CAPM: cost of equity = risk-free rate + beta x equity risk premium. Beta above 1 means the business amplifies market moves; below 1 means it dampens them.

The build-up method then adds a size premium (smaller companies are riskier), an illiquidity premium (private shares cannot be sold quickly) and a specific-company premium for concentration, key-person and other identified risks.

Typical private-company premiums

Size premiums for micro-cap and SME businesses commonly run 4-8 points. Illiquidity adds another 2-5. Specific-company risk — one customer at 40% of revenue, an owner who holds every relationship — can add 3-10.

Document each premium and the evidence for it. An unsupported discount rate is the fastest way to lose an argument with a buyer's adviser.

Call this tool from the API

Every calculator on this site is also an endpoint. Get a free key from the developer page and call it from your product, spreadsheet or AI agent.

curl -X POST https://utopiavalue.co/api/v1/tools/cost-of-equity-calculator \
  -H "Authorization: Bearer $UTOPIA_API_KEY" \
  -H "Content-Type: application/json" \
  -d '{"riskFreeRatePercent":4.2,"beta":1.2,"equityRiskPremiumPercent":6,"sizePremiumPercent":5,"illiquidityPremiumPercent":3,"specificRiskPremiumPercent":4,"currency":"USD"}'

Frequently asked questions

What beta should a private business use?

Take the average unlevered beta of listed peers in the same sector, then relever it to your own capital structure.

What is a typical equity risk premium?

Mature markets generally use 5-7%. Emerging markets add a country risk premium on top.

Why is my cost of equity above 25%?

That is common for small, owner-dependent businesses. It reflects genuine risk and is the arithmetic reason SME earnings multiples are far lower than listed multiples.