How does company size influence WACC and cost of equity?

Company size plays a significant role in determining the Weighted Average Cost of Capital (WACC) and cost of equity, with smaller companies typically exhibiting a higher WACC. This is primarily due to the increased risks associated with small firms compared to their larger counterparts.

Smaller companies often face greater operational volatility, less market visibility, and limited financial resources, making them appear riskier to investors. Consequently, investors demand a higher return to compensate for this elevated risk when investing in smaller firms, which translates into a higher cost of equity. This is reflected in the WACC, as a larger cost of equity increases the overall WACC for smaller businesses.

In contrast, larger companies are usually more stable with established market positions, diversified revenue streams, and better access to capital markets. These factors typically result in a lower cost of equity and WACC, as investors perceive them to be less risky.

This understanding is crucial for financial analysis and investment decision-making, emphasizing that company size can significantly impact the cost of capital calculations and the perceived risk of investments.