Beta is a financial metric that measures the volatility of a company’s stock price compared to the overall market. It is a measure of the company’s risk relative to the market. It is calculated by taking the covariance of the company’s stock return with the market return and dividing it by the variance of the market return. Beta is an important metric for investors as it helps them to understand the risk associated with investing in a particular stock.

Calculating beta for a private limited company is slightly more complicated than calculating beta for a publicly traded company. This is because of the lack of publicly available information on private companies. The most widely used method to calculate beta for a private limited company is the Damodaran method. This method is named after renowned finance professor Aswath Damodaran and is used to calculate the cost of equity for a private company.

The Damodaran method starts with the calculation of the company’s beta. This is done by taking the average of the betas of the companies in the sector that the private company operates in. The betas of these companies are calculated using the same method used for publicly traded companies. It is important to note that the average beta calculated by this method does not account for the differences in the risk between the companies in the sector. Therefore, it is likely to overestimate the beta for the private company.

Once the average beta of the sector is calculated, the private company’s beta is then adjusted to account for the differences in risk between the companies in the sector. This adjustment is done by multiplying the average beta by a risk adjustment factor. The risk adjustment factor is based on the company’s size and its financial leverage, among other factors.

Once the adjusted beta is calculated, the cost of equity is then calculated using the capital asset pricing model (CAPM). This model takes into account the risk-free rate, the expected market return, and the beta of the company to calculate the cost of equity. Once the cost of equity is determined, the beta of the private limited company can then be calculated.

Calculating beta for a private limited company is a complex process and requires a thorough understanding of the company and its sector. Aswath Damodaran’s method is the most widely used method for calculating beta for private companies and is a reliable way to estimate the cost of equity for a private company.