TY - JOUR
T1 - Estimating the cost of capital
T2 - considerations for small business
AU - Palliam, Ralph
N1 - Publisher Copyright:
© 2005, © Emerald Group Publishing Limited.
PY - 2005/9/1
Y1 - 2005/9/1
N2 - Purpose – For publicly traded firms, calculating the cost of capital is predicated typically on information from the financial markets. Small businesses do not have the necessary market-based information. As an alternative to traditional proxy approaches, this paper argues for a multi-criteria model to determine an appropriate equity risk premium, and thereby, a cost of capital. Design/methodology/approach – The study proposes a multi-criteria model – an analytical hierarchy process (AHP) – to determine the cost of capital for small businesses. Findings – Since the three proxy methods are shown to have numerous shortcomings, the use of the AHP model is clearly a method to determine the equity risk premium and the cost of capital for small businesses. Research limitations/implications – The model requires small business managers to identify all information sources for the required input data. Originality/value – The article offers practical help to lenders and small businesses wishing to invest in new capital projects.
AB - Purpose – For publicly traded firms, calculating the cost of capital is predicated typically on information from the financial markets. Small businesses do not have the necessary market-based information. As an alternative to traditional proxy approaches, this paper argues for a multi-criteria model to determine an appropriate equity risk premium, and thereby, a cost of capital. Design/methodology/approach – The study proposes a multi-criteria model – an analytical hierarchy process (AHP) – to determine the cost of capital for small businesses. Findings – Since the three proxy methods are shown to have numerous shortcomings, the use of the AHP model is clearly a method to determine the equity risk premium and the cost of capital for small businesses. Research limitations/implications – The model requires small business managers to identify all information sources for the required input data. Originality/value – The article offers practical help to lenders and small businesses wishing to invest in new capital projects.
KW - Analytical hierarchy process
KW - Capital budgeting
KW - Risk management
UR - http://www.scopus.com/inward/record.url?scp=85015383677&partnerID=8YFLogxK
U2 - 10.1108/15265940510613660
DO - 10.1108/15265940510613660
M3 - Review article
AN - SCOPUS:85015383677
SN - 1526-5943
VL - 6
SP - 335
EP - 340
JO - Journal of Risk Finance
JF - Journal of Risk Finance
IS - 4
ER -