1. What is 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 key component in determining a company's weighted average cost of capital (WACC) and evaluating investment opportunities.

2. How Does the Calculator Work?

The calculator uses the Capital Asset Pricing Model (CAPM):

Where:

• \( K_e \) — Cost of equity (%)
• \( R_f \) — Risk-free rate (%)
• \( \beta \) — Beta coefficient (systematic risk)
• \( R_m \) — Expected market return (%)

Explanation: The CAPM model estimates the cost of equity by adding a risk premium (beta times market risk premium) to the risk-free rate.

3. Importance of Cost of Equity

Details: Cost of equity is crucial for capital budgeting decisions, company valuation, and determining the minimum acceptable return on equity-financed projects.

4. Using the Calculator

Tips: Enter the current risk-free rate (typically 10-year government bond yield), the company's beta (from financial databases), and the expected market return (historical average is often used).

5. Frequently Asked Questions (FAQ)

Q1: What's a typical risk-free rate?
A: Usually the yield on 10-year government bonds of the country where the company operates (e.g., 10-year Treasury yield for US companies).

Q2: How do I find my company's beta?
A: Beta is available from financial databases like Bloomberg, Yahoo Finance, or your brokerage research reports.

Q3: What market return should I use?
A: Historical average market returns are often used (typically 7-10% for US markets), but forward-looking estimates can also be used.

Q4: Are there limitations to CAPM?
A: Yes, CAPM assumes perfect markets and that beta fully captures risk. Other models like Fama-French may be more comprehensive.

Q5: How often should cost of equity be recalculated?
A: It should be updated when market conditions change significantly or when the company's risk profile changes.