1. What is the Cost of Equity?

The cost of equity represents the return a company must offer investors to compensate for the risk of investing in its stock. It's a crucial component in determining a company's weighted average cost of capital (WACC).

2. How Does the Calculator Work?

The calculator uses the Dividend Growth Model formula:

Where:

• \( Ke \) — Cost of equity (decimal)
• \( D1 \) — Expected dividend in next period (USD)
• \( P0 \) — Current stock price (USD)
• \( g \) — Expected dividend growth rate (decimal)

Explanation: The formula calculates the cost of equity by adding the dividend yield (D1/P0) to the expected growth rate of dividends.

3. Importance of Cost of Equity

Details: The cost of equity is essential for investment decisions, capital budgeting, and corporate valuation. It helps determine whether a project will generate sufficient returns to satisfy shareholders.

4. Using the Calculator

Tips: Enter expected dividend in USD, current stock price in USD, and growth rate as a decimal (e.g., 0.05 for 5%). All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: What are typical cost of equity values?
A: For stable companies, Ke typically ranges between 8-12%, but can be higher for riskier companies.

Q2: What are limitations of this model?
A: The Dividend Growth Model only works for companies that pay dividends and assumes constant growth.

Q3: How to estimate the growth rate (g)?
A: Use historical dividend growth, analysts' forecasts, or the sustainable growth rate (ROE × retention ratio).

Q4: What if a company doesn't pay dividends?
A: Alternative models like CAPM (Capital Asset Pricing Model) may be more appropriate.

Q5: How does cost of equity affect stock valuation?
A: Higher cost of equity leads to higher discount rates, resulting in lower present value of future cash flows.