Size Premium
Short definition
A size premium is the extra return small firms are assumed to require above CAPM. The evidence is contested; it must not double-count the same risk already in an illiquidity discount or noisy beta.
Detailed explanation
Source tables (e.g. US small-cap series) do not transplant cleanly onto a thin Turkish market. In a control-stake valuation, size premium and minority/illiquidity discounts should not stack the same risk.
If beta is already inflated on a thin index, adding SP overstates Ke. If a premium is used, write the source, currency and why it is counted once.
Why it matters for the CFO
Adding 2–3 points of “small company” to Ke in a listing report cuts EV materially. The committee should ask whether the premium is separate from an illiquidity discount.
How it is calculated
Ke ≈ Rf + β × ERP + SP (SP, likidite primi ile çift sayılmamalı)
Variables in the formula
- SP: Size (small-cap) premium
How to read it
SP of 2 points lifts Ke by 2 points when β×ERP is unchanged. There is no universal small-cap premium; thinness, control and the data set set it.
Numerical example
CAPM Ke 22%, applied SP 2 percentage points (no illiquidity discount) → Ke = 24%.
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Definitions are educational. They are not investment, credit or tax advice.