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Cost of Equity Calculator.
Estimate cost of equity with explicit CAPM or dividend-growth inputs.
Set your values
Results update as you type.
Results are estimates from the stated formula and inputs; verify assumptions before making financial decisions.
FAQs
How is Cost of Equity calculated?
Market risk, beta, and growth assumptions are user-supplied estimates.
Use Cases
Valuing a company using DCF
The cost of equity is a critical input in discounted cash flow (DCF) analysis. It's used as the discount rate for equity cash flows, helping analysts determine the present value of future cash flows.
Example: If a company's cost of equity is 10%, future cash flows are discounted at 10% to find the company's intrinsic value.
Evaluating investment projects
Companies use the cost of equity as a hurdle rate for new projects. If a project's expected return exceeds the cost of equity, it may be worth pursuing.
Example: A project with an expected return of 12% and a cost of equity of 10% would be considered value-accretive.
Frequently Asked Questions
- What is the cost of equity?
- The cost of equity is the return a company must offer to investors to compensate for the risk of investing in its shares. It's a key component in financial analysis, used in valuation and capital budgeting.
- How does the CAPM calculate cost of equity?
- CAPM formula: Cost of Equity = Risk-Free Rate + Beta × (Market Return – Risk-Free Rate). The risk-free rate is typically the yield on government bonds, beta measures the stock's volatility relative to the market, and the market return is the expected return of the overall market.
- What inputs do I need for this calculator?
- You need three inputs: the risk-free rate (e.g., 10-year Treasury yield), the stock's beta (a measure of systematic risk), and the expected market return (e.g., historical average return of a broad index like the S&P 500).
Tips & Common Mistakes
Tips
- Use a consistent risk-free rate, such as the yield on a 10-year government bond, to match the investment horizon.
- Ensure the beta you use is levered or unlevered appropriately for the company's capital structure.
- The market return should reflect the expected long-term return of the market, not a short-term forecast.
- Re-evaluate inputs periodically as market conditions change, especially the risk-free rate and beta.
Common Mistakes to Avoid
- Using a risk-free rate that doesn't match the currency or country of the company.
- Using a beta that is not adjusted for the company's debt level, leading to an inaccurate cost of equity.
- Confusing the market risk premium (market return minus risk-free rate) with the market return itself.
Last updated: August 13, 2026