The Capital Asset Pricing Model (CAPM) is the standard financial framework for estimating the cost of equity of an asset or company. It postulates that the expected return equals the risk-free rate plus a risk premium proportional to the asset's systematic risk (beta): ke = Rf + β × (Rm - Rf). In business valuation, CAPM provides the theoretical foundation for the cost of equity, which feeds into the WACC. For unlisted SMEs, CAPM is supplemented by a size premium and a specific risk premium to reflect risks not captured by beta alone.

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Example: to estimate the cost of equity for an unlisted Swiss industrial company: risk-free rate (10-year Confederation Bond) = 1.0%; market risk premium = 6.5%; levered beta = 1.05; size premium = 2.0%; SCRP = 1.5%. Cost of equity = 1.0% + 1.05 × 6.5% + 2.0% + 1.5% = 11.3%. This feeds into the WACC calculation as the equity component.

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At Hectelion, CAPM application for unlisted companies is carefully documented, with justified adjustments for size and specific risk that withstand auditor and court scrutiny.