Cost of Capital for Non-Traded Firms

Abstract:     
In this teaching note I make a short review of the major statistics regarding the non traded firms in the U.S. and in Colombia as an example of an emerging market. I show some alternatives to estimate the cost of equity capital when there is not enough trading information. Some of them use the Capital Assets Pricing Model (CAPM), some of them use accounting information or simply, subjective estimation of risk.

The note is organized as follows: In Section One I present some relevant statistics regarding the non traded firms in the U. S. and in Colombia. In Section Two I mention the importance of the emerging markets mostly composed of non-trading firms and the relevance of popular approaches to the estimation of cost of equity capital. In Section Three I distinguish between total and systematic risk and present methods to estimate the cost of equity capital with systematic risk and total risk. When using Accounting Risk Models (ARM) I use data from a well known firm in the Colombian stock market. In Section Four I present some concluding remarks.

Note: This paper is available in Spanish at http://ssrn.com/abstract=391620

Number of Pages in PDF File: 41

Keywords: stocks, stock markets, Colombia, Colombian stock market, nominal returns on stocks, Colombian firms, CAPM, cost equity capital, levered cost of equity capital, unlevered cost of equity capital, non-trading firms, risk free rate of return, risk premium, Accounting Risk Models (ARM), Asset Pricing, Capital Budgeting, Investment Policy

JEL Classification: G12, N26, D92, G14, G31

working papers series