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In finance, the cost of equity is a rate of return a company pays outs to equity investors or shareholders. A cost of equity represents the compensation the market requires for possessing shares and handling with the connected risk.
We can evaluate the attractiveness and risk of the investment by the cost of equity. The simple relation is the higher the risk, the higher the cost, and the cost of equity becomes lower when risk is decreased.
There are two ways to calculate the cost of equity, that depends on the company pays dividends or return with shareholders or not.
If the company is paying dividends then calculate the cost of equity by using the Dividend Capitalization Model . And if the company is not paying a dividend then calculate the cost of equity by using CAPM (Capital Asset Pricing Model).
The Formula For calculating cost of equity as follows:
1. Calculate cost of equity based on Dividend Capitalization Model:
- Cost of Equity = (Dividend Per Share / Current Market Value) + Growth Rate of Dividend
2. Calculate cost of equity based on CAPM model:
- Cost of Equity = Risk-Free Rate of Return + Beta * (Market Rate of Return - Risk-Free Rate of Return)
What can you do with Cost Of Equity Calculator?
- It helps to calculate the cost of equity and helps to analyze the risk of the investment.
- Users can see the accurate value of the cost of equity.
- This calculator helps to share your calculations by URL.