— Business & Valuation
Cost of Equity Calculator
Estimate the return shareholders require using CAPM, dividend growth, or build-up methods. Compare the cost of equity from risk-free rate, beta, equity risk premium, dividends, growth, and risk premiums for valuation and WACC.
Cost of equity (CAPM)
10.05%
- Dividend growth model
- 8%
- Build-up
- 9.5%
- Growth implied by the price
- 7.05%
Try: CAPM, Dividend growth model, Build-up with premiums, Emerging market (+CRP)
— The cost-of-equity build-up
| Component | Contribution | Running total |
|---|---|---|
| Risk-free rate | 4% | 4% |
| Beta (1.1) × ERP | 6.05% | 10.05% |
| = Cost of equity (CAPM) | 10.05% |
— The three methods compared
| Method | Cost of equity | Key assumption |
|---|---|---|
| CAPM | 10.05% | Beta 1.1, ERP 5.5% |
| Dividend growth | 8% | 3% yield + 5% growth |
| Build-up | 9.5% | Rf + ERP + premiums |
— How the cost of equity is built
Download— How it works
CAPM: Rₑ = R_f + β·ERP [+ country + size premiums]. Dividend growth model: Rₑ = D₁ ÷ P₀ + g. Build-up: Rₑ = R_f + equity risk premium + size + company-specific [+ country].
CAPM — the standard method
The capital asset pricing model is the dominant way to estimate the cost of equity: start from the risk-free rate and add a risk premium equal to the stock’s beta times the equity risk premium. Beta scales the market’s premium to the individual stock — a beta of 1.0 means it’s as risky as the market, above 1 means more. The model says investors are only compensated for market (systematic) risk, which beta measures. The calculator shows this as a build-up — the risk-free rate plus the beta-adjusted premium (plus any country or size premium) stacking up to the final rate — so each component’s contribution is visible. For an unlisted company or a more reliable beta, use Hamada relevering: take a comparable’s beta, strip out its leverage, and relever it to your own capital structure.
Worked example — risk-free 4%, beta 1.1, ERP 5.5%: Cost of equity = 4% + 1.1 × 5.5% = 4% + 6.05% = 10.05%. The dividend growth model and build-up give 8% and 9.5% on the same company — the spread is the estimation uncertainty.
The dividend growth model and the build-up
The dividend growth model (Gordon model) takes a completely different route: it backs the cost of equity out of the share price. Rearranged from the dividend-discount formula, the required return equals the forward dividend yield (next year’s dividend over the current price) plus the perpetual growth rate. It’s elegant for stable, dividend-paying companies but useless for non-payers, and very sensitive to the growth assumption. The build-up method is for when no reliable beta exists — common for private companies: stack the risk-free rate with an equity (market) risk premium, then add explicit premiums for size and company-specific risk, and a country premium for emerging markets. It’s more subjective than CAPM but transparent. Because all three rest on different assumptions, the calculator computes and compares them, and reads out the growth the share price implies at the CAPM return as a cross-check.
Why it matters — and the country premium
The cost of equity is usually the largest input to a valuation: it’s the discount rate for equity cash flows and the dominant component of WACC, so a one-point change moves intrinsic value materially. That makes the estimation method and assumptions worth scrutinising — which is exactly why showing the methods side by side is more honest than quoting a single figure. One adjustment matters especially in emerging markets: the country risk premium. For an Indian or other EM company, the local risk-free rate already embeds some risk, and an additional country premium is standard practice; omitting it understates the cost of equity and overstates value. Educational tool only — not investment advice; the cost of equity is an estimate built on judgement calls about beta, the equity risk premium and growth.
— Reader questions
How do you calculate the cost of equity?
Most commonly with CAPM: the risk-free rate plus beta times the equity risk premium (Rₑ = R_f + β × ERP). Alternatives are the dividend growth model (forward dividend yield plus growth) and the build-up method (risk-free rate plus stacked risk premiums). Each gives a slightly different answer, so comparing them is good practice.
What is a typical cost of equity?
For a developed-market company it’s often in the high single digits to low teens — say 8–12% — depending on the risk-free rate, the stock’s beta and the equity risk premium. Riskier or emerging-market companies are higher, sometimes 15%+ once a country premium is added. It should always exceed the cost of debt, since equity is riskier than debt.
What is the difference between CAPM and the dividend growth model?
CAPM derives the cost of equity from risk — the risk-free rate plus a beta-scaled market premium — and works for any stock. The dividend growth model derives it from the share price — dividend yield plus growth — and only works for stable dividend-payers. CAPM is more general; the dividend model is a useful cross-check when dividends are predictable.
Why is the cost of equity higher than the cost of debt?
Because equity is riskier. Debt holders are paid first and have contractual claims; equity holders are last in line and bear the residual risk, so they demand a higher return to compensate. Equity also gets no tax shield, unlike interest. That’s why the cost of equity is the larger component of WACC.
What is beta relevering (the Hamada equation)?
A way to get a beta for a company without a reliable one of its own: take a comparable company’s observed (levered) beta, remove the effect of its debt to get the unlevered beta, then relever it to your company’s own debt-to-equity ratio. The result reflects your capital structure rather than the comparable’s, giving a more appropriate CAPM input.