Build-Up Method
A practitioner approach to cost of equity that starts with the risk-free rate and adds explicit premia for systematic risk (beta * ERP), size, and company-specific risk: Cost of Equity = Rf + beta * ERP + Size Premium + Specific Risk Premium. The size premium is typically sourced from published Kroll / Duff and Phelps Size Premia Reports (200-400 bps depending on the firm's market-cap decile); the specific-risk premium covers customer concentration, key-person risk, key-supplier risk, and similar idiosyncratic factors (typically 0-300 bps). Build-up is the dominant convention for small-cap private valuations and for cases where CAPM alone produces a cost of equity below the firm's actual cost of debt.
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Related terms
Ambiguity Aversion · Anchored Assumption · Asset Beta · Bank ROE Spread · Banker Pitch Deck · Beta
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