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The use of different cost of equity models when valuing SMEs: A case study

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This study examines the valuation process of small and medium-sized enterprises (SMEs), using a Portuguese SME as a case study. The analysis focuses on calculating the cost of equity, with particular attention to the unique characteristics of these companies. The valuation was conducted using the discounted cash flow (DCF) method, with a preference for the average cost model. Two different approaches were employed to forecast free cash flows: (a) the geometric growth rate of sales, and (b) free cash flow projections derived from a model based on historical results. To calculate the cost of equity, three distinct models were used: (a) the capital asset pricing model (CAPM) with modifications proposed by Damodaran (2014), (b) the model developed by the Spanish Association of Accounting and Business Administration (AECA) from Rojo-Ramírez et al. (2012), and (c) the build-up model proposed by Ibbotson. These models serve as alternatives to the traditional CAPM, which is less suitable for unlisted companies due to the absence of a market beta. The study compares the results obtained from each model, focusing on their impact on the company’s valuation. Valuing SMEs is crucial for enhancing corporate decision-making. Furthermore, the approaches utilized in this study provide valuable guidelines for financial analysts involved in SME valuation.

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  • Gomes, António & João Jorge, Maria & Gonçalves Pereira, Ana, 2025. "The use of different cost of equity models when valuing SMEs: A case study," Small Business International Review, Asociación Española de Contabilidad y Administración de Empresas - AECA, vol. 9(1), pages 705-705, March.
    • Handle: RePEc:aaz:sbir01:v:9:y:2025:i:1:p:e705
    DOI: 10.26784/sbir.v9i1.705
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    1. Abudy, Menachem & Benninga, Simon & Shust, Efrat, 2016. "The cost of equity for private firms," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 431-443.
    2. John Koeplin & Atulya Sarin & Alan C. Shapiro, 2000. "The Private Company Discount," Journal of Applied Corporate Finance, Morgan Stanley, vol. 12(4), pages 94-101, January.
    3. Laurence Capron & Jung‐Chin Shen, 2007. "Acquisitions of private vs. public firms: Private information, target selection, and acquirer returns," Strategic Management Journal, Wiley Blackwell, vol. 28(9), pages 891-911, September.
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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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