πΉ Cost of Equity Calculator
Calculate the cost of equity using the CAPM method or the Dividend Discount Model.
Cost of Equity Methods
CAPM: Ke = Rf + Ξ²(Rm β Rf). Most common method. Requires beta estimate and market risk premium assumption.
DDM: Ke = Dβ/P + g. Best for stable dividend-paying companies.
Two Methods for Estimating Cost of Equity
CAPM Method: Cost of Equity = Rf + Ξ² Γ (Rm β Rf). Best for publicly traded companies where beta can be observed. Simple and widely accepted. Dividend Growth Model (Gordon Growth): Cost of Equity = Dβ/Pβ + g. Best for mature dividend-paying companies with stable, predictable growth. Dβ is next year's expected dividend, Pβ is current stock price, and g is the sustainable dividend growth rate.
Why Cost of Equity Is Always Higher Than Cost of Debt
Equity investors bear more risk than debt holders β they are last in line in bankruptcy and have no contractual return. This risk demands a premium. Additionally, debt interest is tax-deductible, reducing its after-tax cost. Combined, cost of equity for most companies runs 3β8 percentage points above the after-tax cost of debt. For a company with 6% after-tax debt and 12% cost of equity, WACC at 50/50 capital structure = 9%.
People Also Ask
For large-cap US companies: 8β12%. Small-cap: 12β18%. Emerging markets: 15β25%+. Tech growth companies: 12β20%. Utilities: 7β10%. The range reflects the equity risk premium added to the risk-free rate, adjusted for company-specific beta. Very few companies have a cost of equity below 8% in a normal rate environment.
They are the same thing from different perspectives. From the investor's perspective, it's the expected return they demand for holding the stock. From the company's perspective, it's the cost of equity capital β what they must deliver to satisfy shareholders. If a company's return on equity (ROE) consistently exceeds cost of equity, it creates shareholder value.
Use CAPM for companies that don't pay dividends (most growth companies), companies with unstable dividend history, or when you want a market-based estimate. Use the Dividend Growth Model for mature, stable dividend-payers where the Gordon Growth assumptions are realistic (constant growth, dividend policy stable). Many practitioners use both and average the results.