# Cost of Equity Calculator

Calculate cost of equity using the CAPM model. Enter risk-free rate, beta, and market return to find the required return for equity investors.

## What this calculates

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.

## Inputs

- **Risk-Free Rate (%)** (%) — min 0, max 20 — Current yield on 10-year US Treasury bonds.
- **Beta** — min 0, max 5 — The stock's beta coefficient (market sensitivity). 1.0 = same as the market.
- **Expected Market Return (%)** (%) — min 0, max 30 — Expected annual return of the overall market (e.g., S&P 500 historical average).

## Outputs

- **Equity Risk Premium** — formatted as percentage — Market return minus risk-free rate (Rm - Rf).
- **Beta-Adjusted Premium** — formatted as percentage — Equity risk premium multiplied by beta.
- **Cost of Equity (Ke)** — formatted as percentage — The required rate of return using CAPM.

## Details

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.

## Frequently Asked Questions

**Q: What is a good cost of equity?**

A: Cost of equity varies by industry and risk level. Low-risk utility companies might have a cost of equity around 7-9%, while high-growth tech stocks could be 12-15% or higher. As a general benchmark, the long-run average cost of equity for US large-cap stocks is roughly 8-12%. A company should earn at least its cost of equity to satisfy shareholders.

**Q: Where do I find a stock's beta?**

A: Beta is available on any major financial data site like Yahoo Finance, Google Finance, or Bloomberg. Look for it on the stock's summary or statistics page. Most sites calculate beta using 5 years of monthly returns against the S&P 500. Keep in mind that beta is backward-looking and can change as a company's risk profile evolves.

**Q: What is the equity risk premium?**

A: The equity risk premium (ERP) is the extra return investors expect from stocks over the risk-free rate. It equals the expected market return minus the risk-free rate. Historically, the US ERP has averaged about 5-7% per year. During economic uncertainty, the required premium tends to increase as investors demand more compensation for taking on stock market risk.

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Source: https://vastcalc.com/calculators/finance/cost-of-equity
Category: Finance
Last updated: 2026-04-08