Cost of Equity Calculator
Calculate your company's Cost of Equity using the Capital Asset Pricing Model (CAPM). Determine your required return on equity and make better investment decisions.
Note: Enter the financial data below to calculate your cost of equity. All percentage values should be entered as numbers (e.g., enter 4.5 for 4.5%). The calculator uses the Capital Asset Pricing Model (CAPM) formula: Re = Rf + β(Rm - Rf).
Understanding the Cost of Equity
Cost of Equity represents the return that shareholders require for investing in a company. It's a critical component for calculating a company's Weighted Average Cost of Capital (WACC) and evaluating investment opportunities.
The Capital Asset Pricing Model (CAPM)
The most common method to calculate the cost of equity is the Capital Asset Pricing Model (CAPM):
Re = Rf + β(Rm - Rf)
Where:
Re = Cost of Equity
Rf = Risk-free Rate
β = Beta (measure of volatility/risk relative to the market)
Rm = Expected Market Return
Rm - Rf = Market Risk Premium
Extended CAPM
The extended version of CAPM includes additional premiums to account for company size or country risk:
Re = Rf + β(Rm - Rf) + Size Premium + Country Risk Premium
Components Explained:
- Risk-free Rate (Rf): The theoretical return of an investment with zero risk, typically the yield on long-term government bonds (e.g., 10-year U.S. Treasury bonds).
- Beta (β): Measures a stock's volatility compared to the market. A beta of 1.0 indicates the stock moves with the market. A beta greater than 1.0 indicates higher volatility, while less than 1.0 indicates lower volatility.
- Market Risk Premium (Rm - Rf): The additional return investors expect to receive for taking on the risk of investing in the market rather than risk-free assets.
- Size Premium: Additional return required for investing in smaller companies, which are generally considered riskier than larger ones.
- Country Risk Premium: Additional return required for investing in countries with higher economic, political, or financial risks compared to developed markets.