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Work out the cost of debt or equity investors' required return for both a listed and a privately held company

CFA® Level II · Corporate Finance · Cost of Capital: Advanced Topics · L2.CI.3.e

The idea

For a public company, apply the methods directly: yield on its traded bonds for the pre-tax cost of debt, and the CAPM using its own beta and an equity risk premium defined as market return minus the risk-free rate. For a private company, borrow a beta from listed peers: unlever it with βU = βE ÷ [1 + (1 − t) × D/E], then relever at the target structure with βE = βU × [1 + (1 − t) × D/E]. Add size and company-specific premiums where justified, and estimate the cost of debt from a synthetic rating or bank rates. Traps include multiplying beta by the market return rather than the premium, and skipping the (1 − t) term.

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