The cost of equity (ke) is the return required by shareholders in exchange for the risk they bear — the highest-cost component of the WACC and the most sensitive parameter in a DCF model. It is estimated using CAPM: ke = Rf + β × (Rm - Rf), supplemented for unlisted SMEs by a size premium and a specific risk premium. Switzerland and France 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: risk-free rate = 1.0%; market risk premium = 6.5%; levered beta = 1.05; size premium = 2.0%; SCRP = 1.5%. Cost of equity = 11.3%. At 65% equity weight in the capital structure, the equity component contributes 7.3% to the overall WACC — the dominant driver of the discount rate.

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At Hectelion, cost of equity construction is carefully documented with justified premia, enabling conclusions that withstand auditor, court and tax authority scrutiny.