Cost of Equity Calculator
Calculate the cost of equity using CAPM model or dividend capitalization model
Calculate Cost of Equity
Capital Asset Pricing Model
For non-dividend paying stocks
Dividend Capitalization Model
For dividend-paying companies
Usually government bond yield (e.g., 10-year Treasury)
Expected return from stock market (e.g., S&P 500 average)
Measure of stock volatility relative to market (1.0 = market average)
Cost of Equity Results
Formula used: Cost of Equity = Risk-free rate + β × (Market rate - Risk-free rate)
Risk Assessment
Example: Dividend-Paying Company
Company Profile
Current Share Price: $70
Dividend Per Share: $2 (next year expected)
Dividend Growth Rate: 3% annually
Method: Dividend Capitalization Model
Calculation
Cost of Equity = (DPS / CSP) + GRD
Cost of Equity = ($2 / $70) + 3%
Cost of Equity = 2.857% + 3%
Cost of Equity = 5.857%
Interpretation
• Company needs to provide 5.857% return to equity investors
• For every $100 invested now, investors expect $105.86 in future value
• This represents the minimum acceptable return for shareholders
Method Selection Guide
CAPM Model
Use for non-dividend stocks
Requires market data and beta
Dividend Model
Use for dividend-paying stocks
Simpler but requires dividends
Beta Interpretation
Less volatile than market (defensive stocks)
Moves with market (average volatility)
More volatile than market (growth stocks)
Highly volatile (high-risk stocks)
Understanding Cost of Equity
What is Cost of Equity?
The cost of equity represents the return that shareholders require for investing in a company. It's the compensation investors demand for taking on the risk associated with owning the company's equity.
Why is it Important?
- •Investment evaluation and comparison
- •Company valuation and DCF models
- •Capital structure optimization
- •Performance measurement benchmark
Formula Comparison
CAPM Model
Re = Rf + β × (Rm - Rf)
Best for non-dividend paying stocks
Dividend Model
Re = (DPS / CSP) + GRD
Only for dividend-paying companies
Note: Higher cost of equity indicates higher risk and investor expectations for returns.