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 capital budgeting and valuation.

2. How Does the Calculator Work?

The calculator uses the Dividend Growth Model (Gordon Growth Model):

Where:

• \( K_e \) — Cost of equity (decimal)
• \( D_1 \) — Expected dividend in next period (USD)
• \( P_0 \) — Current stock price (USD)
• \( g \) — Expected dividend growth rate (decimal)

Explanation: The model assumes dividends will grow at a constant rate indefinitely and that the growth rate is less than the cost of equity.

3. Importance of Cost of Equity

Details: Cost of equity is used to evaluate investment opportunities, determine optimal capital structure, and calculate weighted average cost of capital (WACC).

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: Typically ranges from 8% to 20% (0.08 to 0.20 in decimal form) depending on company risk and market conditions.

Q2: What if a company doesn't pay dividends?
A: For non-dividend paying companies, other models like CAPM (Capital Asset Pricing Model) may be more appropriate.

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

Q4: What are the model's limitations?
A: Assumes constant growth, which may not be realistic. Also requires dividend payments, so not suitable for all companies.

Q5: How does this differ from WACC?
A: WACC includes both cost of equity and cost of debt, weighted by their proportions in capital structure.