How the Cost of Equity Calculator Works

One calculation engine produces every number on this site, from the homepage calculator to the worked examples in the guides. This page shows what it does so you can check it. All rates are annual percentages.

CAPM

equity risk premium = expected market return - risk-free rate
cost of equity      = risk-free rate + beta x equity risk premium
                      + size premium + country risk premium (optional)

With a 5% risk-free rate, a beta of 1.2 and a 5% premium: 5% + 1.2 x 5% = 11%. If you enter an expected market return instead of a premium, the calculator subtracts the risk-free rate first. Size and country premiums, when you enter them, are added in full on top. Some analysts scale a country premium by beta or by the company's exposure to that country instead. To do that, enter the scaled figure.

Dividend growth model

next dividend (D1) = current dividend (D0) x (1 + growth)
cost of equity     = D1 / share price + growth

A $50 stock that just paid $2.00 with 4% growth: D1 = $2.08, yield = 4.16%, cost of equity = 8.16%. If you choose "next year's dividend", the calculator uses your figure as D1 and does not grow it again.

Build-up method

cost of equity = risk-free rate + equity risk premium + size premium
                 + industry risk premium + company-specific risk premium

5% + 5% + 3% + 0% + 2% = 15%. The industry premium can be negative. No beta is used.

Levered beta and WACC (used in the guides)

levered beta = unlevered beta x (1 + (1 - tax rate) x debt / equity)
WACC         = E / (D + E) x cost of equity + D / (D + E) x cost of debt x (1 - tax rate)

An unlevered beta of 0.9 at a debt-to-equity ratio of 0.5 and a 21% tax rate relevers to about 1.26. A company with 60% equity at 11% and 40% debt at 6% before tax has a WACC of about 8.5%.

Default inputs

• Risk-free rate 5%: a round example near recent long-term Treasury yields. Check the current Treasury yield curve and use the maturity that fits your forecast period.
• Equity risk premium 5%: matches Kroll's recommended US premium. Damodaran's implied premium ran from 4.23% to 6.12% between 2015 and 2025.
• Beta 1.2: an example a little riskier than the market. Industry averages are on Damodaran's betas by sector page.
• Size premium 3% and company-specific premium 2% on the private company tab: placeholders to show the method, not estimates for any real business.

What it does not do

It does not look up live market data, estimate a beta from price history, or tell you which method is right for a company. Those are judgment calls. Cost of equity in Excel shows how to estimate a beta from returns yourself.