An analyst constructs a privately held firm's cost of equity using the "build-up" method. The 10-year Treasury bond rate is 4% and the historical equity risk premium for the S&P 500 stock index is 5.5%. The risk premium associated with firms of this size is 3.8% and for firms within this industry is 2.4%. Based on due diligence, the analyst estimates the risk premium specific to this firm to be 2.5%. What is the firm's cost of equity based on this information?

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The Answer is 4.0% + 5.5% + 3.8% +2.4% +2.5% = 18.2%

An Analyst Constructs a Privately Held Firm's Cost of Equity