How to calculate cost of equity in wacc?

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Illingworth 0 Comments

I am trying to calculate the cost of equity to put it in the weighted average cost of capital. Do you know how I can calculate it?

1 Answer

score 0 · Answer 1 · 2012-12-02T22:49:27+00:00

The cost of equity can be calculated using the capital asset pricing model and by using the dividend growth model.

Using the capital asset pricing model, the cost of equity is :

Cost of equity= Risk Free Rate + Beta*(Market Return-Risk free Rate) where:

Risk free rate is the return of a security that has not risk (usually a government bond). Market Return is the return of an index (NYSE, SP500 etc.).

Using the dividend growth model, the cost of equity can be found as :

Cost of Equity = (Next Years Dividend/Stock Price) + Dividend Growth Rate