Cost of Equity

Cost of equity is the rate of return a company's shareholders require for the risk of owning its stock. It is the company's cost of using their money, and analysts use it as the discount rate for cash flows that belong to equity holders.

It is usually estimated with the capital asset pricing model. With a 5% risk-free rate, a beta of 1.2 and a 5% equity risk premium, the answer is 11%. The cost of equity calculator also has dividend growth and build-up tabs. The FAQ gives a short answer to what cost of equity is.

Cost of equity feeds the weighted average cost of capital, where it is blended with the after-tax cost of debt. It is usually the larger of the two, since shareholders are paid last. See whether cost of equity can be less than the cost of debt and what a good cost of equity is.