For Companies traded at the Stock Exchanges, Beta-Factors are available (CAPM). But most companies are not traded on the Stock Exchanges (many SMEs).
So how can the risk premium of the Equity (for the cost of capital) be calculated for an non puplic-traded company?
Given that beta is calculated based on price volatility compared to the market as a whole, a non-traded company will not have a large quantity of daily/hourly/minutely price data. However the underlying principle of risk could still be evaluated qualitatively either by
Also bear in mind that beta has been subject to criticism as a calculation of equity risk premium, so you may also wish to take another approach. Article attached in that regard.
Use time-varying beta coefficient estimates of the sector to which the company belong. Then choose a beta value from the range of betas depending on your assessment of where the company may be can be located i.e above the average , below the average etc.
Perhaps, you can try to use the EBIT of this company and compute the covariance of this variable with the mean accounting number of the industry for the relevant period. Thus you will also have to compute the EBIT's variance of the sector. It may be better to consider a ratio like (EBIT /assets) to undertake your computations. This will give you an idea of the business risk. If you want to get the total risk, you may have to consider the covariance and variance of the net profits with respect to the mean sector evolution. .
If a market is driven by nonfundamental speculative factors, taking GDP as a proxy for market index can yield misleading results of betas.
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