Risk Premium SME

Estimating the cost of capital of small and medium-size enterprises (SME) is a challenging task. The tool below allows you to conduct a very rough estimate of the appropriate risk premium to obtain the WACC of a (mature) SME.

Here is how it works:

  1. Enter the firm's EBIT (in USD) and its average tax rate in the fields below. Also enter the future expected rate of inflation.
     

  2. Provide an estimate of the cost of capital (WACC) of (large) listed firms that operate in the same industry as your company. You can obtain rough estimates from www.waccexpert.com. See our dedicated Online Module to learn more about the estimation of the cost of capital.
     

  3. Based on the values that you have entered, we then compute the estimated average risk premium for a mature SME with these characteristics.

How to use the results? There are two ways to incorporate the additional risks of SME in your valuation. If you are dealing with a mature company, the two approaches should yield similar ultimate valuations.

  1. Use the "Adjusted Cost of Capital (WACC) for SME" to capitalize the future free cash flows of your company. 
     

  2. Use the "normal" cost of capital for listed firms to capitalize the future free cash flows of your company. Then apply the the "Average Valuation Discount for SME" to this initial valuation.