All,

Since equity financing is the other side of the coin of debt financing,
and it has been a little quiet recently (thank you Collision for
remedying that), figured I would resume my dive into the basics of
corporate finance in the Third Imperium.

Thanks to comments and feedback from quite a few posters on my earlier
(Ian Whitchurch, Rupert Boleyn, Kurt Feltenberger, Phil Pugliese, Robert
Aiken, and Jeff Zeitlin, to name those I can easily find), I've got a
reasonable mechanism for digging up 3I risk-free rates.  The actual
_value_ of that rate is less important than the process to get there.

However, a non-state-owned business financed by debt alone is also known
by another name - bankrupt.

What do the _owners_ of a given business (such as the
Ethically-Challenged Merchant PCs of stereotypical fame, or the
Shiishuginsa Family Trust) require for their capital, on average?

Yes, equity financing gets paid last, after every other sod.  But it can
_still be priced_.

For lack of a better model, I'll posit the Capital Asset Pricing Model
(CAPM) - and note I am aware of Richard Roll's
(https://www.anderson.ucla.edu/faculty-and-research/finance/faculty/roll)
critique of it, plus the laundry list of concerns on its wiki page. 
Note the "lack of better model" constraint I'm operating under.  If
you've got a better choice, justify it and throw it in.

Broadly, the CAPM requires three parameters:

1 - Rf - the risk-free interest rate

2 - E(Rm) - the expected market return

3 - beta - the sensitivity of the excess asset returns to excess market
returns - for overall market, by definition, this is 1

Cost of equity = Rf + (E(Rm) - Rf) * beta

Rf can be determined from the previous discussion.  Beta is
business-specific, so the next parameter coming down the pipe is the
expected annual market return.

As equity surrenders the contractual payment obligation that defines
debt, the equity buyer is taking on more risk than the debt buyer, and
thus will logically demand compensation for that additional risk - ie, a
higher return.  Thus, cost of equity will _exceed_ cost of debt in
non-pathological situations.

So, Learned Members, what would a reasonable mechanism for that expected
market return _be_ ?

--