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Investment Dictionary


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Cost of Equity

 

Cost of equity is the rate of return that is required by equity owners from their investment. Of course, requirements of the shareholders have to be real and meet market conditions as well. Basically cost of equity should show the potential return from the stock or other equity investment on annual basis. 

 

Cost of equity is a significant part of weighted average capital cost (also called WACC). WACC consists of two parts: cost of equity and cost of debt, and those two measures are weighted proportionally. 

 

There might be different methods to calculate cost of equity but the classical and the most popular method is Capital Asset Pricing Model (CAPM).

 

Cost of equity formula

 

Cost of equity = Risk free rate + Equity risk premium

 






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