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I have a company that I want to value that is very thinly traded. Its stock has been very erratic. Doing a regression gives me a beta of 0.52 (std. err. 0.43). In other words useless.

What is the best way of estimating its cost of equity?

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There are a number of ways you can do this and there is a tonne of material on the web researching this in depth.

The easiest approaches you can take without getting too deep in the mathematics and fundamentals would be either of the following:

  1. Sector average - Take the weighted average (by revenue, assets or market cap) levered beta from traded companies within the same sector then unlever it to arrive at a pretty good approximate.

  2. Comparable companies - Find companies with very similar capital structure and operations and wither take the median or average.

There would normally be some form of illiquidity premium added to this however that is another topic all together. Aswath Damodaran explores this topic quite a bit with respect to illiquid companies and calculation of betas for private companies which can be found here and contains many examples using excel.

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