Cost of Equity Calculator

Cost Equity = CAPM or DDM

\[ \text{Cost of Equity} = \text{Risk-Free Rate} + \beta \times (\text{Market Return} - \text{Risk-Free Rate}) \]

\[ \text{Cost of Equity} = \frac{\text{Dividend per Share}}{\text{Current Stock Price}} + \text{Growth Rate} \]

Calculation Method:

Risk-Free Rate:

decimal

Beta (β):

Expected Market Return:

decimal

Cost of Equity:

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1. What is Cost of Equity?

The cost of equity is the return a company requires to decide if an investment meets capital return requirements. It represents the compensation investors demand for taking on the risk of owning the company's stock.

2. Calculation Methods

There are two primary methods to calculate cost of equity:

Capital Asset Pricing Model (CAPM):

\[ \text{Cost of Equity} = R_f + \beta \times (R_m - R_f) \]

Where:

\( R_f \) — Risk-free rate (typically 10-year Treasury yield)
\( \beta \) — Beta (measure of stock volatility relative to market)
\( R_m \) — Expected market return

Dividend Discount Model (DDM):

\[ \text{Cost of Equity} = \frac{D_1}{P_0} + g \]

Where:

\( D_1 \) — Expected dividend per share next year
\( P_0 \) — Current stock price
\( g \) — Expected dividend growth rate

3. Importance of Cost of Equity

Details: Cost of equity is a key component in calculating a company's weighted average cost of capital (WACC), which is used to evaluate investment opportunities and determine the minimum return required from projects.

4. Using the Calculator

Tips: Select your preferred calculation method (CAPM or DDM) and enter the required parameters. All values must be valid positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: Which method should I use?
A: CAPM is more widely used, especially for companies that don't pay dividends. DDM is appropriate for mature, dividend-paying companies.

Q2: What's a typical cost of equity range?
A: Typically between 8-15%, but varies by industry, company risk, and market conditions.

Q3: How do I get the beta value?
A: Beta can be obtained from financial databases like Bloomberg, Yahoo Finance, or calculated using regression analysis of stock returns vs market returns.

Q4: Why is cost of equity higher than cost of debt?
A: Equity investors take more risk than debt holders and therefore require higher returns.

Q5: How often should cost of equity be recalculated?
A: It should be updated regularly as market conditions, interest rates, and company fundamentals change.