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Cost of Equity for an Unlisted Company

Mayur Khetshi Nisar (Practice) (139 Points)

30 April 2010

HI Friends,

Can anybody tell me, how to calculate Cost of equity for WACC for an unlisted Company. ?

Regards

Mayur

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4 Replies

CA Dhiraj Ramchandani (CA, M. com) (10823 Points)
Replied 30 April 2010

Hi buddy...

A. For an unlisted company, there can't be any term like "MARKET VALUE" of equity shares..

B. So, in my regards, the value of such share should be considered at FACE VALUE or else the ISSUE PRICE... Because once the shares are issued, they r unlisted and their market value does not exist..

This is my view, let any expert come and give more explaination regarding the same

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CA Dhiraj Ramchandani (CA, M. com) (10823 Points)
Replied 30 April 2010

The cost of equity is calculated by the following formula:

$\mathrm{Cost\ of\ Equity} = \frac{\mathrm{Next\ Year's\ Dividends\ and\ Equity\ Appreciation\ per\ Share}}{\mathrm{Current\ Market\ Value\ of\ Stock}}\ +\ \mathrm{Growth\ Rate\ of\ Dividends}$

However, there are also a variety of other ways to estimate the cost of equity. For example, using the CAPM model, the cost of equity is the product of the MARKE RISK PREMIUM and the equity's BETA plus the RISK FREE INTEREST RATE.

$\mathrm{Cost\ of\ Equity} = Market\ Risk\ Premium\ * \ Equity\ Beta\ +\ \mathrm{Riskless\ Rate}$