Size Premium

A size premium is extra return added to cost of equity for a small company, on the view that small firms carry risks CAPM does not fully capture. It is a standard line in the build-up method for private businesses.

In this site's build-up example, a 3% size premium sits on top of a 5% risk-free rate and a 5% equity risk premium. With no industry adjustment and a 2% company-specific premium, cost of equity totals 15%. The 3% is an example, so pick a figure that fits the company and your data source.

Analysts disagree about how large the effect is and whether it still holds, so document your source. Size premiums come up in what a good cost of equity is and in cost of equity for a private company. See also the build-up method.