The mistake often made is to stop here. Applying a specific company risk premium in the capitalization rate implies that the subject company is riskier than the hypothetical typical micro-cap company. Many factors form the parameters of a subject company's degree of risk. Investments in smaller entities are typically more speculative in nature. The Ibbotson data is a treatise on how investments in small companies typically carry a greater expected rate of return.
Small size tends to be accompanied by many of the risks listed below.
Access to Capital Markets. Publicly traded entities and larger companies generally have greater access to avenues of raising money than small, closely held firms. Breadth of Customer Base. Dependence upon a few customers who could easily buy from a competitor is a significant risk. Many businesses have suffered in recent years not by their own fault, but because they were located in a particular region of the country that fell into recession.