Cost of Equity Calculator
Calculate the cost of equity using the Capital Asset Pricing Model (CAPM). Enter the risk-free rate, the stock's beta, and the expected market return to determine the minimum return that equity investors require.
The Capital Asset Pricing Model (CAPM) formula is: Ke = Rf + beta x (Rm - Rf). With a 4.5% risk-free rate, a beta of 1.2, and a 10% expected market return, the cost of equity is 4.5% + 1.2 x (10% - 4.5%) = 11.1%.
Beta measures how much a stock moves relative to the overall market. A beta of 1.0 means the stock moves in lockstep with the market. A beta of 1.5 means 50% more volatile, while a beta of 0.7 means 30% less volatile. Higher beta stocks carry more systematic risk, so investors demand a higher return.
Cost of equity is a key input for calculating WACC (weighted average cost of capital), which companies use to evaluate investment decisions and set hurdle rates for new projects. If a project cannot return more than the WACC, it destroys shareholder value. The risk-free rate typically uses the 10-year Treasury yield, and the equity risk premium is often estimated between 4-7% based on long-run historical data.