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Page written by Ian Hawkins. Last reviewed on March 10, 2026. Next review due April 1, 2027.
This calculator is intended for illustration purposes only and exact payment terms should be agreed with a lender before taking out a loan.
The cost of equity represents the return required by investors for holding a company’s stock. It reflects the opportunity cost of investing in the company’s equity rather than alternative investments with similar risk profiles.
To calculate the cost of equity, you can use the Capital Asset Pricing Model (CAPM) or the Dividend Discount Model (DDM). I’ll explain both methods:
Cost of equity = risk-free rate + beta × (market return – risk-free rate)
Here’s how to calculate it:
Cost of Equity = Dividends per share / stock price + dividend growth rate
Here’s how to calculate it:
Please note that both methods have their limitations and should be used in conjunction with other financial analysis tools when evaluating the cost of equity.
As mentioned earlier, there are two ways to calculate the cost of equity. The first is based on the CAPM model, and the second is the Dividend discount model (DDM) or the dividend capitalization model. The latter is simpler, but it can only be used if the company is paying dividends.
Cost of Equity Formula based on CAPM Model:
Cost of Equity=Risk-free rate of return+β×(Market rate of return−Risk-free rate of return)
Formula based on the Dividend Capitalization Model:
Cost of Equity=(DPS/CSP)+GRD
Let’s go through an example using the dividend capitalization model. Imagine a company with a current share price of $100. The company announced a dividend of $3 per share this year, which is expected to grow by 4% annually. The cost of equity for this company is calculated as follows:
Cost of Equity=($3/$100)+4%=7%
We can understand this value as the company’s cost. To obtain an additional $100 in cash from investors right now, they would theoretically have to pay them $107 in the future.
The cost of equity represents the return required by equity investors, while the cost of debt reflects the interest rate paid by a company on its borrowed funds. Equity investors bear more risk than debt holders and, and therefore require a higher return. The cost of equity is often higher than the cost of debt due to the increased risk associated with equity investments.
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