Cost of Equity Calculator (CAPM)

Calculate the Cost of Equity using the Capital Asset Pricing Model (CAPM) β€” the return equity investors require to compensate for risk.

COST OF EQUITY (REQUIRED RETURN)

11.1%

EQUITY RISK PREMIUM

5.50%

BETA Γ— ERP

6.60%

Re = 4.5% + 1.2 Γ— (10% βˆ’ 4.5%) = 11.1%

πŸ’‘ Cost of Equity: What Shareholders Demand

The Cost of Equity represents the minimum annual return that equity investors expect for bearing the risk of owning a company's stock. It is a critical input for WACC calculation and DCF valuation. Unlike debt, equity has no contractual interest rate β€” the 'cost' is implicit, based on market expectations.

The most widely used model is CAPM: Cost of Equity = Risk-Free Rate + Beta Γ— (Expected Market Return βˆ’ Risk-Free Rate). The risk-free rate is typically the 10-year government bond yield. Beta measures the stock's sensitivity to market movements. The equity risk premium (Rm βˆ’ Rf) represents the extra return investors demand for holding stocks over risk-free bonds.

Risk-Free Rate 4.5% + Beta 1.2 Γ— (Market Return 10% βˆ’ 4.5%) = Cost of Equity of 11.1%. This stock must earn at least 11.1% annually to satisfy investors β€” anything less means the stock is likely overvalued.

Cost of Equity Calculator (CAPM) FAQ

πŸ”— Related Calculators

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