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

In: Estimating SMEs Cost of Equity Using a Value at Risk Approach

Author

Listed:
  • Federico Beltrame

    (University of Udine)

  • Roberto Cappelletto

    (University of Udine)

  • Gabriele Toniolo

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.

Suggested Citation

  • Federico Beltrame & Roberto Cappelletto & Gabriele Toniolo, 2014. "Application of the Capital at Risk Model to Small and Medium Enterprises," Palgrave Macmillan Books, in: Estimating SMEs Cost of Equity Using a Value at Risk Approach, chapter 4, pages 85-104, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-137-38930-5_5
    DOI: 10.1057/9781137389305_5
    as

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