Cost of equity

The cost of equity (ke) is the minimum return required by shareholders to invest in a company, reflecting the risk they bear as residual claimants after all creditors. It is estimated using CAPM: ke = Rf + β × (Rm - Rf), supplemented for unlisted SMEs by a size premium and a specific risk premium (SCRP). It is always higher than the cost of debt (shareholders bear residual risk), making it the highest-cost and dominant component of the WACC and the most sensitive parameter in a DCF model. For unlisted Swiss SMEs, it typically ranges from 9% to 18% depending on size, sector and specific risk profile. Switzerland and France also differ in their risk-free rates (Confederation Bond vs OAT), creating a structural difference in cost of equity and WACC, and therefore in valuation conclusions for comparable businesses in the two jurisdictions.

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Example: for an unlisted Swiss industrial SME: Rf 1.0% + beta 1.14 × MRP 6.5% (= 7.4%) + size premium 2.5% + SCRP 1.5% = cost of equity 12.4%. Weighted at 60% in the capital structure (60% equity / 40% debt), it contributes 7.4% to a total WACC of 8.7%. A 1-point increase in cost of equity (to 13.4%) increases WACC to 9.3%, reducing DCF enterprise value by approximately 8%.

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At Hectelion, we document every cost of equity component individually, with justified premia and market references, one of the most scrutinised parameters by auditors, courts and tax authorities in valuation reports.