Calculating required rate return on equity
Return concepts: Build up model => rf + Rp + size pr. + co. specific pr.
Private comapny: Build up model => rf + Rp + size pr. + co. specific pr. + industry pr.
When using build up model, should we add whatever premium question give us?
Use the premiums that alow the return of a private company be similar to that of a public company. At least that’s how I see it.
that means when should we add industry pr.?
Yes, the point of the build up method is to assign a required return to a company that doesn’t have a “market”. Therefore you add relevant risk premiums to the RF to estimate what the required return is.
The buildup method is just a special case of the multifactor model execpt you don’t use Betas.
Yes you add it in buildup method
agree with Galli - build-up method is used to make premiums that alow the return of a private company be similar to that of a public company.