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The Cost of Capital for Private Businesses

In: Analysing, Planning and Valuing Private Firms

Author

Listed:
  • Federico Beltrame

    (University of Udine)

  • Alex Sclip

    (University of Verona)

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.

Suggested Citation

  • Federico Beltrame & Alex Sclip, 2023. "The Cost of Capital for Private Businesses," Springer Books, in: Analysing, Planning and Valuing Private Firms, chapter 0, pages 69-92, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-38089-1_3
    DOI: 10.1007/978-3-031-38089-1_3
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