I have always wondered how did we come up with these many premiums to add to our cost of capital calculation e.g. size premium, liquidity premium. Like how we do know if a certain risk factor has already been factored into the cost of capital calculation (presumably beta of the cost of capital). It seems as if people are adding these premiums based on a whim, is there any logical or systematic guideline/framework on when should we add these firm-specific premiums? Estimating how much premium% should we add to the cost of capital is another thing.
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