Cost of Equity Calculator (CAPM)
Calculate the Cost of Equity using the Capital Asset Pricing Model (CAPM) — the return equity investors require to compensate for risk.
COST OF EQUITY (REQUIRED RETURN)
11.1%
EQUITY RISK PREMIUM
5.50%
BETA × ERP
6.60%
Re = 4.5% + 1.2 × (10% − 4.5%) = 11.1%
💡 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 — the 'cost' is implicit, based on market expectations.
The most widely used model is CAPM: Cost of Equity = Risk-Free Rate + Beta × (Expected Market Return − 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 − Rf) represents the extra return investors demand for holding stocks over risk-free bonds.