How to determine cost of equity?

Question

0

Harman 0 Comments

What are the formulas that I can use if I want to calculate the cost of equity for a company? Are there more than one ways to calculate the cost of equity?

1 Answer

score 0 · Answer 1 · 2012-12-02T19:30:47+00:00

You can get cost of equity either from the dividend growth model or from the capital asset pricing model.

For the dividend growth model, you have:

Cost of equity = ((dividend paid) * (1+dividend growth))/(price)

For the capital asset pricing model (CAPM), the formula is :

Cost of equity= Rf + beta*(Rm-Rf)
Where Rf is the risk free rate (us treasury bills for example)
Beta is the beta of the stock (the one you want to find the cost of equity for) and
Rm is the return of the market (for example an index such as SP500 or FTSE100 etc.)