About the Cost of Equity Calculator
Cost of equity is the return a company must earn before its shareholders consider themselves fairly paid, and it is the most argued over input in any valuation. Two standard routes exist. The capital asset pricing model builds the number from a risk-free rate plus beta times the market risk premium, giving 9.75 percent for a beta of 1.15 in a market expected to return 9 percent against a 4 percent bond.
The dividend growth route asks the market instead of a model. Divide next year expected dividend by the current share price, add the growth rate you expect that dividend to sustain, and you have the return implied by what buyers are paying today. A share at 60 that just paid 2.40 and grows dividends at 3 percent implies 7.12 percent. When the two methods disagree by several points, that gap is itself information about beta estimates or growth assumptions being stretched.
Pick the method with the selector; the fields for both stay visible so you can switch and compare without retyping. The dividend route only works for a company that actually pays a stable and growing dividend, which rules out most young firms. Whichever number you settle on becomes the discount rate for the DCF Calculator and the required return in the DDM Calculator.
How to use
- Choose CAPM or Dividend growth from the method selector.
- For CAPM, fill the risk-free rate, beta and expected market return.
- For the dividend route, fill the dividend just paid, the current share price and the growth rate.
- Switch between the two methods to see how far apart they land for the same company.
Common questions
- What is the cost of equity formula?
- CAPM gives Ke = risk-free rate + beta x (market return - risk-free rate). The dividend growth model gives Ke = D1 / P0 + g.
- Which method should I use?
- CAPM suits any listed company with a measurable beta. The dividend route needs a steady growing dividend, so it fits mature payers such as utilities.
- Why do the two answers differ?
- They price different things. CAPM uses market wide risk, while the dividend model uses what buyers currently pay for one company cash flow. A wide gap usually means one input is optimistic.
- Is cost of equity the same as WACC?
- No. WACC blends the cost of equity with the after tax cost of debt in proportion to how the company is financed, so it sits below the cost of equity for a geared firm.