Cost of Equity Calculator
Estimate the required rate of return on your company’s stock with this free online cost of equity calculator.
Whether you’re valuing a business, comparing investments, or working on a finance assignment, this tool helps you quickly compute the cost of equity using:
- Dividend Discount / Dividend Capitalization Model (for dividend-paying companies)
- Capital Asset Pricing Model (CAPM) (for companies that don’t pay dividends or where you prefer a market-based approach)
What is Cost of Equity?
Cost of equity is the return that equity investors expect in exchange for taking the risk of investing in a company’s shares.
You can think of it as:
- The minimum return shareholders require to hold your stock.
- A key input when calculating discount rates, company valuation, and weighted average cost of capital (WACC).
- A way to compare the risk and attractiveness of different investments.
A higher cost of equity usually means:
- Investors see the company as riskier, so they demand a higher return.
- The company may need to deliver stronger performance to create shareholder value.
How to Use the Cost of Equity Calculator
You can use the calculator in two main ways: one for dividend-paying companies and one for non-dividend or growth companies.
1. Choose whether the company pays dividends
At the top of the tool:
- Select Yes if the company pays regular dividends and you want to use the Dividend Capitalization Model.
- Select No if it doesn’t pay dividends, or you prefer a market-driven approach using CAPM.
The input fields will line up with the option you choose.
2. For dividend-paying companies (Dividend Discount Model)
When you choose the dividend model, fill in:
Click Calculate to see the Cost of Equity based on the dividend discount model.
3. For non-dividend companies (CAPM)
When you choose the CAPM model, fill in:
- Risk-Free Rate of Return (%)
Typically the yield on a long-term government bond (e.g., 10-year government bond yield in your country). - Market Rate of Return (%)
The expected return of the overall stock market (often approximated using a broad market index). - Beta Coefficient (Volatility #)
A measure of how volatile your stock is compared to the market:- β = 1 → moves with the market
- β > 1 → more volatile / riskier than the market
- β < 1 → less volatile than the market
Click Calculate to see the Cost of Equity based on CAPM.
4. Read the result
Under the Cost section, the calculator shows:
- Cost of Equity – the required rate of return for equity investors, expressed as a percentage.
You can use this output directly in:
- Discounted cash flow (DCF) models
- WACC calculations
- Investment and capital budgeting decisions
Cost of Equity Formulas Used
This cost of equity calculator is based on two widely used models in corporate finance.
Dividend Discount / Dividend Capitalization Model
For companies that pay steady, growing dividends, the cost of equity (Ke) can be approximated as:
Ke = (Dividend per Share / Current Market Price) + Dividend Growth Rate
Where:
- Dividend per Share = expected annual dividend
- Current Market Price = current stock price
- Dividend Growth Rate = expected annual growth in dividends
This approach works best when:
- Dividends are relatively stable and predictable
- The company has a mature, consistent dividend policy
Capital Asset Pricing Model (CAPM)
For companies that may not pay dividends, or when you prefer a market-based approach, CAPM is used:
Ke = Risk-Free Rate + Beta × (Market Return − Risk-Free Rate)
Where:
- Risk-Free Rate = return on a risk-free asset (e.g., government bond)
- Market Return = expected return of the stock market
- Beta = stock’s sensitivity to market movements
CAPM ties a company’s expected return directly to:
- Systematic market risk (beta)
- The equity risk premium (Market Return − Risk-Free Rate)
When Should You Use a Cost of Equity Calculator?
A cost of equity calculator is helpful in many real-world situations:
- Valuing a company or stock
Use cost of equity as the discount rate in a discounted cash flow (DCF) model. - Comparing investment opportunities
Compare cost of equity across different companies or sectors to understand relative risk and required return. - Setting a hurdle rate for projects
Use cost of equity (or WACC) as a minimum return required for new investments or capital projects. - Determining WACC (Weighted Average Cost of Capital)
Cost of equity is one side of the capital structure equation along with cost of debt. - Teaching & learning finance
Students and instructors can quickly explore how changes in beta, market return, or dividend growth impact cost of equity.
Cost of Equity vs Cost of Debt vs WACC
Understanding how cost of equity fits into the bigger picture helps you make better financial decisions.
Cost of Equity
- The return expected by shareholders
- Higher because equity investors take more risk than lenders
- Used as a discount rate for equity cash flows
Cost of Debt
- The effective interest rate a company pays on its loans and bonds
- Often lower than cost of equity due to:
- Priority of debt claims in bankruptcy
- Tax deductibility of interest in many jurisdictions
WACC (Weighted Average Cost of Capital)
WACC blends cost of equity and after-tax cost of debt based on their proportions in the company’s capital structure. It’s typically used as:
- The overall discount rate for valuing a firm
- A benchmark for capital budgeting decisions
Your cost of equity from this calculator can plug directly into your WACC calculations.
Choosing Reasonable Input Values
If you’re not sure what numbers to use, here are some practical tips:
- Risk-Free Rate
- Use the yield on a 10-year government bond in your country.
- Market Rate of Return
- Use long-term average stock market returns (commonly 7–10% in many developed markets, but check recent estimates).
- Beta
- Look up the company’s beta on major financial data sites.
- For private companies, use a comparable listed company and adjust if needed.
- Dividend Growth Rate
- Start with historical dividend growth as a baseline.
- Adjust for future expectations, business maturity, and industry trends.
Remember: cost of equity is an estimate, not a precise truth—use ranges and scenario analysis where possible.
Example Use Cases
Here are a few ways users typically apply this cost of equity calculator:
- A startup founder estimating the return equity investors might expect.
- A finance student learning CAPM and dividend discount models.
- A business owner comparing issuing more equity vs taking on debt.
- An investor checking whether a stock’s expected return justifies its risk.
Frequently Asked Questions
Is cost of equity the same as return on equity (ROE)?
No. They’re related but different:
- Cost of equity = the required return investors expect.
- Return on equity (ROE) = the actual return the company generates on shareholders’ equity.
If ROE > cost of equity, the company is generally creating value for shareholders.
What is a “good” cost of equity?
There’s no single “good” number. It depends on:
- The company’s industry and risk level
- The country and interest rate environment
- The capital structure and growth prospects
Higher-risk companies will naturally have a higher cost of equity.
Can I use this for private companies?
Yes, but you’ll need to estimate:
- A beta based on similar public companies
- An appropriate market return and risk-free rate
The calculator still works as a way to structure your assumptions, even if some inputs are approximations.
More Financial Tools on CodersTool
If you’re working on financial analysis, you might also find these free tools helpful:
Use the Cost of Equity Calculator together with these tools to build more complete, consistent financial models and make better-informed decisions.