The Cost of Capital for Private Businesses

Federico Beltrame () and Alex Sclip ()
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Federico Beltrame: University of Udine
Alex Sclip: University of Verona

Chapter Chapter 3 in Analysing, Planning and Valuing Private Firms, 2023, pp 69-92 from Springer

Abstract: Abstract This chapter provides an alternative pricing model to estimate the cost of capital of privately owned companies. The chapter is divided into two parts. The first highlights the critical issues of the widely used Capital Asset Pricing Model, while the second proceeds by proposing a new method for the calculation of the cost of capital. The method is based on the idea that the expected return on debt for a company exclusively financed through debt can be approximated to the expected return on shareholder capital in an unlevered scenario. To arrive at the estimation, we propose a model to estimate the probability of default and how to lever it to a non-distressed scenario in which a company is exclusively financed through debt.

Keywords: Cost of capital; Private firms; Totally levered firm; Z-Score; Probability of default (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-38089-1_3

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DOI: 10.1007/978-3-031-38089-1_3

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