What this cost of equity calculator does
This calculator finds your cost of equity. You enter a risk-free rate, a market return, and beta. The tool then applies the CAPM formula. So you see the return shareholders require. It is shown as a yearly percent. The result helps you judge investments.
What cost of equity is
Cost of equity is the return shareholders expect. It is the price a firm pays for equity. A riskier firm must offer more. So it sets a bar for new projects. Investors compare it to likely returns. It guides both pricing and planning.
How it is calculated
The tool uses the CAPM formula. It starts with the risk-free rate. It adds beta times the market premium. The market premium is the return above the risk-free rate. So a higher beta lifts the result. The result is your cost of equity.
What the result tells you
The result shows your cost of equity. A risk-free rate of four with a beta of 1.2 gives about eleven percent. A higher beta raises it. A bigger market return raises it too. So it shows the return equity must earn. It is only an estimate.
The risk-free rate
The risk-free rate is the safe return. It is often a government bond yield. It is the floor under the whole sum. So every cost of equity starts here. A higher safe rate lifts the result. Use a current bond yield. Enter your risk-free rate.
The expected market return
The expected market return is the broad market's return. It is what a wide index might earn. The gap over the risk-free rate is the premium. So a bigger market return widens the premium. Use a long-run market average. History often suggests a figure here. Enter your expected market return.
Beta
Beta measures how much a stock swings. A beta of one moves with the market. Above one means it swings more. So a higher beta means more risk. The tool scales the premium by beta. A beta of 1.2 adds a fifth more premium. Enter your beta.
The risk premium
The risk premium is the extra over the safe rate. Here the market gives about six percent over it. Beta of 1.2 lifts that to about seven. So the premium sits on top of the risk-free rate. A higher beta widens this premium. It is the reward for taking on risk. Watch how beta moves it.
How to use it
Enter your risk-free rate first. Add the market return and beta. Read the cost of equity as a percent. Then try a higher beta. See how the figure shifts. Compare a few firms. Use it to judge investments.
The limits of this calculator
This tool comes with limits. It uses the CAPM model only. Beta is hard to pin down exactly. Past beta may not hold in future. The market premium is an estimate too. So read it as a guide. So check your inputs with care.
A final tip
Use this to gauge your cost of equity. Remember it rests on estimates. Use a current risk-free rate. Check beta from a reliable source. Compare the figure across firms. Do not treat it as exact. A careful view guides your decisions.