Industry Premium
An Industry Premium refers to an additional premium added to a company’s Cost of Equity to account for the unique risks and opportunities associated with a specific industries. Drivers such as growth potential, competition, regulatory environment and overall market conditions.
Example
Let’s say you use the CAPM to analyze a business in the AI industry and you come up with a Cost of Equity (Coe) of 14%. Now, you think about the risk around the AI industry and determine that it deserves to be a bit more risky, so you add an Industry Premium of 4%. Now your updated Cost of Equity is 18% (14% + 4%).
In the room
Another judgment-based addition to the cost of equity. Mentioning that CAPM alone often understates risk for a specific sector shows you treat models as tools rather than answers.