Final answer:
The cost of equity is typically higher for smaller companies with lower market caps due to higher risk and uncertainty. However, the cost of equity can also vary depending on the industry sector.
Step-by-step explanation:
The cost of equity is typically higher for smaller companies with lower market caps. In this case, the $500 million market cap company would likely have a higher cost of equity compared to the $5 billion market cap company.
This is because smaller companies are generally considered to have higher risk and uncertainty, which translates to higher expected returns for investors.
Investors require a higher rate of return to compensate for the increased risk associated with smaller companies.
Additionally, smaller companies may have limited access to capital markets and may need to rely on more expensive sources of financing.
However, it is important to note that the cost of equity can also vary depending on the industry sector. Different sectors may have different risk profiles, which can impact the cost of equity for companies in those sectors.