Which company is likely to have a higher Cost of Equity?

A company with a lower market capitalization, such as one with a $500 million market cap, is likely to have a higher Cost of Equity compared to larger companies. The Cost of Equity reflects the return expected by investors to compensate for the risk they undertake investing in a company's equity.

Smaller companies typically carry higher risk because they often have less diversified revenue streams, more volatility in their earnings, and less established market presence. These factors contribute to a higher perceived risk from the investor's perspective. Consequently, investors will demand a higher return to compensate for that heightened risk, resulting in a higher Cost of Equity.

In contrast, larger companies, like those with a $1 billion, $5 billion, or $10 billion market cap, tend to have more stable operations, established markets, and better access to capital. These attributes generally lead to a lower Cost of Equity, as investors feel more secure investing in established companies with proven track records. Thus, the smaller company is perceived as being riskier, explaining its higher Cost of Equity.