Chap 2 return concepts says build up method for required return is rf + Rp + size pr. + co. specific pr.
Private co valuation says los 37.h build up model = rf + Rp + size pr. + co. specific pr. + industry pr.
Y industry premium aded in los 37.h and not added in chap 2 return concepts ???
plse help!!!
Found this:
Elements of the build-up approach. The build-up approach was introduced in the reading on return concepts. When guideline public companies (public-company comparables for the company being valued) are not available or of questionable comparability, appraisers may rely on a build-up method rather than the CAPM or other models. The build-up method is similar to the expanded CAPM but excludes the application of beta to the equity risk premium. Many view betas that are different from 1.0 as substantially reflecting industry risk factors and thus do not include an industry risk premium in the expanded CAPM. In the build-up model, in which beta is implicitly assumed equal to 1.0, an argument exists to include an industry risk adjustment (premium or discount), although there are challenges in measuring industry risk adjustments. As the baseline implementation of the build-up model, we take the model with an industry risk adjustment.
(Institute 211)
Institute, CFA. 2015 CFA Level II Volume 4 Equity. Wiley Global Finance, 2014-07-14. VitalBook file.
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I’d say, small and private => use the Indy Risk
Yeah
You use the build up method when there is no comparable firms around.
Required return = Rf + Market risk premium + Size premium + Industry specific premium + Firm specific premium.
You use the expanded form when there are comparable firms around, but you need to take into account the subject smaller size and its specific risk.