When cost of equity is negative?

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Morley 0 Comments

I calculated cost of equity but it seems to be negative. Is it wrong or can it also be negative? When can cost of equity be negative and what are the things that I can change to make it work?

1 Answer

score 0 · Answer 1 · 2012-12-02T19:03:03+00:00

Using the dividend growth model, if the dividend growth is negative, your cost of equity will be negative. This is more of a model limitation though (at least the practical implication and what exactly negative dividend growth can reflect).

If you use the CAPM to calculate the cost of equity for example, the treasury bills can have negative returns. In this case, if the return of the market is too low or negative, then you will get a negative cost of equity.