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The size premium return in excess of CAPM is calculated by taking the realized return in excess of the riskless rate and subtracting the estimated return in excess of riskless rate. This calculation is:

While the Beta captures increased risk for the smaller companies, it does not explain all of the small company return. The difference between the actual returns and the CAPM estimated returns can be attributed solely to size. With this approach it makes more theoretical sense to add a company specific premia with the understanding that the Beta does capture return differences based on size. The following tables show both methods to build up a discount rate.

Using the data based on means gives a total of 20.9% as a risk premium before adding company specific, industry specific, and possibly size specific premiums. This number may or may not include factors other than size. However, Ibbotson argues that using the Beta Adjusted approach, giving a result of 17.63%, is a better approach because the company specific premium components, other than size, can be more accurately determined.

You will need to add company specific risk and potentially industry specific risk as well when using the Beta Adjusted approach. As stated above, when using the build up based on means, you may also need to add a size component to the company specific premia based on the difference in size between the target company and the average capitalization of the small stock equity premia that you selected.