Cost of Equity

The annual return shareholders expect for the risk of owning a company's stock.

Part of the Intrinsic Value & DCF course · Lesson 8 of 15

Formula

Re = Rf + Beta x (Rm - Rf); where Rf = risk-free rate, Rm - Rf = equity risk premium

What it is

Cost of equity is the rate of return investors demand to hold a company's shares rather than a safer alternative. It is not a cash cost the company pays directly; it is the implied price of equity capital based on risk. It is almost always higher than the cost of debt because shareholders are last in line if the business fails.

Why it matters

It feeds directly into WACC and is used as the discount rate when valuing equity cash flows or dividends. A higher cost of equity means investors view the stock as riskier, which lowers the present value of its future cash flows and therefore its intrinsic value.

How it's calculated

Most commonly estimated with the Capital Asset Pricing Model (CAPM): the risk-free rate plus the stock's beta times the equity risk premium. An alternative is the dividend-growth approach (dividend yield plus expected dividend growth rate).

How Quintarthai uses it

Beta — the main driver of CAPM-based cost of equity — is shown on each company's Statistics tab, letting you reproduce the cost-of-equity estimate behind a valuation.

Cross-border note. Match the risk-free rate to the listing's home market and currency: a 10-year Government of Canada yield for a Canadian issuer, a 10-year US Treasury for a US one. Equity risk premiums also differ modestly between the two markets.

FAQ

What is a typical cost of equity?

For large, stable companies it is often roughly 7-10%, but it rises with beta and with interest rates. Smaller or more volatile companies can be well above that. There is no single correct number — it depends on the risk-free rate and the firm's risk.

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