Application of the Capital at Risk Model to Small and Medium Enterprises

Federico Beltrame, Roberto Cappelletto and Gabriele Toniolo
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Federico Beltrame: University of Udine
Roberto Cappelletto: University of Udine

Chapter 4 in Estimating SMEs Cost of Equity Using a Value at Risk Approach, 2014, pp 85-104 from Palgrave Macmillan

Abstract: Abstract The model provided for the estimated cost of the equity capital of the unlevered firm requires some consideration and study in order to better interpret meaning and applicability. As we know from the previous chapter, the model can be expressed as follows: % MathType!MTEF!2!1!+- % feaaguart1ev2aaatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn % hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr % 4rNCHbGeaGqiVu0Je9sqqrpepC0xbbL8F4rqqrFfpeea0xe9Lq-Jc9 % vqaqpepm0xbba9pwe9Q8fs0-yqaqpepae9pg0FirpepeKkFr0xfr-x % fr-xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaGaamOCamaaBa % aaleaacaWGVbaabeaakiabg2da9iaadkhadaWgaaWcbaGaamOzaaqa % baGccqGHRaWkcaWGdbGaamyyaiaadkfadaWgaaWcbaGaaiyjaiaacY % cacaWGubGaamitaaqabaGccaaMc8UaaiikaiaadkhadaWgaaWcbaGa % amOuaiaad6eacaGGSaGaamivaiaadYeaaeqaaOGaeyOeI0IaamOCam % aaBaaaleaacaWGMbaabeaakiaacMcaaaa!4CEB! $${r_o} = {r_f} + Ca{R_{\% ,TL}}\,({r_{RN,TL}} - {r_f})$$ In particular, it is necessary to specify what procedures to adopt to obtain the capital at risk (CaR) and the loss rate necessary to quantify the risk-neutral rate. The other parameters do not require further study as the risk-free rate is a common reference also for other techniques of asset pricing whereas the probability of default is 100% for a totally levered firm.

Keywords: Cash Flow; Risk Model; Equity Capital; Lever Firm; Tangible Fixed Asset (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-1-137-38930-5_5

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DOI: 10.1057/9781137389305_5

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