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Cost of Equity
Definition
The return shareholders require to compensate for the risk of owning the stock.
How It Works
Most commonly estimated via CAPM (Re = Rf + β × MRP) or by rearranging the Gordon Growth Model (Re = D1/P + g).
Example
Using CAPM with Rf=3%, β=1.1, MRP=6%: Re = 3% + 1.1×6% = 9.6%.
Common Misconceptions
- ✗Cost of equity equals the dividend yield
- ✗It is always lower than cost of debt
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FAQs
Common questions about Cost of Equity
Equity holders are last in line for payment and bear more risk, so they demand a higher return.
Yes. Rearrange the Gordon Growth Model: Re = D1/P0 + g. This method works well for stable, dividend-paying companies but requires a reliable growth rate estimate.
Related Terms
Browse All Terms
📉 Discount Rate🧮 Net Present Value (NPV)🎯 Internal Rate of Return (IRR)⚖️ Weighted Average Cost of Capital (WACC)📈 Beta (β)📊 Capital Asset Pricing Model (CAPM)🛡️ Risk-Free Rate💹 Market Risk Premium💲 Cost of Equity🏦 Cost of Debt♾️ Terminal Value💸 Free Cash Flow🏢 Enterprise Value🚧 Hurdle Rate🔁 Annuity♾️ Perpetuity💵 Yield to Maturity (YTM)✂️ Coupon Rate📅 Amortization🔍 Sensitivity Analysis