Cost of Equity Calculator

Does the company pay dividend?

Current market value:

Dividend Per Share:

Cost of Equity:

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Our cost of equity calculator helps estimate the return a company must offer its shareholders for investing their capital. This return represents the compensation investors expect for the risk they take by providing equity to the business.

The cost of equity may vary depending on market conditions, company performance, and the risk associated with the investment.

What is Cost of Equity?

The cost of equity is the required rate of return that a company must deliver to its equity investors under prevailing market conditions. A ROI calculator can be used to estimate the expected return based on the invested equity amount.

How to Find Cost of Equity?

The cost of equity can be calculated using two widely accepted financial models:

The Dividend Capitalization Model (DCM)
The Capital Asset Pricing Model (CAPM)

The Dividend Capitalization Model (DCM)

The Dividend Capitalization Model calculates the cost of equity by dividing the expected dividend per share (D1) by the current market value (P0) of the stock, then adding the dividend growth rate (g).

Formula:

Re = (D1 / P0) + g

Where:

Re = Cost of equity
D1 = Expected dividend per share next year
P0 = Current share price
g = Dividend growth rate

Practical Example:

Suppose XYZ Co. has a current share price of $10 and announces a dividend of $0.85 per share to be paid next year. The dividend growth rate is 4%. Calculate the cost of equity:

Re = (0.85 / 10) + 4%

Re = 12.5%

The Capital Asset Pricing Model (CAPM)

The Capital Asset Pricing Model (CAPM) explains the relationship between systematic risk and expected return. A CAPM calculator is commonly used to calculate the cost of equity by incorporating the risk-free rate, market return, and beta.

Formula:

Ra = Rrf + [Ba × (Rm − Rrf)]

Where: