1. What is the CAPM Cost of Equity?

The Capital Asset Pricing Model (CAPM) estimates the expected return on equity or the cost of equity capital. It describes the relationship between systematic risk and expected return for assets, particularly stocks.

2. How Does the Calculator Work?

The calculator uses the CAPM equation:

Where:

• Risk Free Rate — Typically the yield on government bonds (e.g., 10-year Treasury)
• Beta (β) — Measures the volatility of an investment compared to the market
• Market Premium — Expected return of the market minus the risk-free rate

Explanation: The model suggests investors demand additional return (premium) for taking on additional risk beyond the risk-free rate.

3. Importance of Cost of Equity

Details: The cost of equity is a crucial component in corporate finance, used for capital budgeting, valuation, and determining a company's weighted average cost of capital (WACC).

4. Using the Calculator

Tips: Enter all values as decimals (e.g., 0.05 for 5%). Beta should be positive (typically between 0.5-2.0 for most companies).

5. Frequently Asked Questions (FAQ)

Q1: What's a typical risk-free rate?
A: Often the 10-year government bond yield, typically between 2-5% in developed markets.

Q2: How do I find a company's beta?
A: Beta is available from financial data providers like Bloomberg, Yahoo Finance, or your broker's research.

Q3: What's a reasonable market premium?
A: Historically 4-8%, but varies by market and time period. Academic studies often use 5-6%.

Q4: Are there limitations to CAPM?
A: Yes, it assumes markets are efficient and investors hold diversified portfolios. Other models like Fama-French may be more comprehensive.

Q5: How often should I recalculate cost of equity?
A: Regularly, as market conditions change. At least quarterly for financial analysis purposes.