What is cost of equity?

Cost of equity is the return shareholders require for owning a company's stock. It is what the company has to earn on their money to justify the risk they take. With a 5% risk-free rate, a beta of 1.2 and a 5% equity risk premium, CAPM puts it at 11%.

Nobody sends the company a bill for it. It is an opportunity cost: if the business cannot beat what investors could earn on stocks of similar risk, they would rather sell and buy those. That makes it the bar for new projects and the discount rate for cash flows that belong to shareholders.

There are three common ways to estimate it. The capital asset pricing model works for listed stocks, the dividend growth model fits steady dividend payers, and the build-up method suits private firms. The cost of equity calculator runs all three.