Estimating the cost of capital: considerations for small business

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12 Scopus citations

Abstract

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.

Original languageEnglish
Pages (from-to)335-340
Number of pages6
JournalJournal of Risk Finance
Volume6
Issue number4
DOIs
StatePublished - 1 Sep 2005

Keywords

  • Analytical hierarchy process
  • Capital budgeting
  • Risk management

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