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. Estimated using CAPM: ke = Rf + β × MRP + size premium + SCRP. It is always higher than the cost of debt (shareholders bear residual risk) and is the dominant component of the WACC. For unlisted Swiss SMEs, it typically ranges from 9% to 18% depending on size, sector and specific risk profile.

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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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Hectelion documents every cost of equity component individually with market references — one of the most scrutinised parameters by tax authorities and auditors in valuation reports.