Which company should have a higher cost of equity, a company with a $100 million market cap, or a company with a $100 billion market cap?

Let me break it down simply:

Think of companies like ships. Big ships (large caps) handle rough seas better than small boats (small caps). The same market storm creates more risk for smaller companies.

The $100 million company typically has a higher cost of equity. Why? It's usually younger, less diversified, and more vulnerable to market shifts. Like a small restaurant that could get crushed by one new competitor.

Big companies have advantages. The $100 billion giant likely has diverse revenue streams, established market position, and better access to capital. Like a massive retailer that can survive a downturn in one product line.

Size affects liquidity too. Large-cap stocks are easier to buy and sell, like cash in your pocket. Small-cap stocks can be harder to trade - investors demand higher returns for this extra risk.

Remember: Smaller usually means riskier. Higher risk means investors demand higher returns. That's why small-cap stocks typically have higher costs of equity - investors need more potential upside to accept the extra risk.

Talk soon,

Sam