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Cost of Equity Calculator
Calculate the cost of equity using CAPM, Dividend Discount Model, and Bond Yield + Premium method. Includes sensitivity analysis and method comparison.
CAPM Cost of Equity⧉
13.40%
Rf + β × MRP = 5% + 1.2 × 7%
DDM Cost of Equity⧉
8.15%
Dividend yield + growth rate (Gordon Growth Model)
Bond Yield + Premium⧉
10.40%
Risk-free + credit spread + equity premium
Average Estimate⧉
10.65%
Average of CAPM, DDM, and Bond Yield methods
Sustainable Growth⧉
9.00%
ROE × Retention Ratio — implied dividend growth rate
Implied Cost (SGR)⧉
14.45%
DDM cost using sustainable growth rate instead of stated growth
Method Comparison
CAPM
13.40%
DDM
8.15%
Bond+Prem
10.40%
CAPM Sensitivity (Beta × MRP)
| β \ MRP | 5% | 6% | 7% | 8% | 9% |
|---|---|---|---|---|---|
| 0.50 | 7.5% | 8.0% | 8.5% | 9.0% | 9.5% |
| 0.75 | 8.8% | 9.5% | 10.3% | 11.0% | 11.8% |
| 1.00 | 10.0% | 11.0% | 12.0% | 13.0% | 14.0% |
| 1.25 | 11.3% | 12.5% | 13.8% | 15.0% | 16.3% |
| 1.50 | 12.5% | 14.0% | 15.5% | 17.0% | 18.5% |
| 1.75 | 13.8% | 15.5% | 17.3% | 19.0% | 20.8% |
| 2.00 | 15.0% | 17.0% | 19.0% | 21.0% | 23.0% |
Planning notes, formulas, and examples
About the Cost of Equity Calculator
The cost of equity is the return a company must offer its shareholders to compensate them for the risk of owning its stock. It is a critical input for discounted cash flow (DCF) valuations, weighted average cost of capital (WACC), and corporate finance decisions about capital allocation.
There is no single definitive way to calculate cost of equity — it must be estimated. The three most common approaches are CAPM (Capital Asset Pricing Model), the Dividend Discount Model (Gordon Growth Model), and the Bond Yield plus Risk Premium method. Each has strengths and weaknesses, which is why practitioners often compute all three and triangulate.
This calculator computes cost of equity using all three methods simultaneously, allowing you to compare and cross-check. The sensitivity table shows how the CAPM result changes across different beta and market risk premium assumptions, which is essential for building valuation ranges rather than single-point estimates.
When This Page Helps
Estimating cost of equity is one of the most debated topics in finance. Small changes in assumptions can dramatically shift a company's valuation. This calculator lets you run multiple methods and sensitivity scenarios in seconds, giving you the range of estimates needed for robust financial analysis. It is useful when you need a defensible discount rate for DCF, WACC, or capital budgeting.
How to Use the Inputs
- Enter the risk-free rate (10-year Treasury yield is standard).
- Enter the stock's beta coefficient.
- Enter the market risk premium or let it calculate from expected market return minus risk-free rate.
- For DDM, enter the current dividend per share, stock price, and expected dividend growth rate.
- Enter the company's ROE and payout ratio for sustainable growth analysis.
- Compare all three methods and check the sensitivity table for a range of estimates.
Formula used
CAPM: Ke = Rf + β × (Rm − Rf)
DDM (Gordon Growth): Ke = [D₁ / P₀] + g
Bond Yield + Premium: Ke = Rf + Credit Spread + Equity Premium
Sustainable Growth = ROE × (1 − Payout Ratio)Example Calculation
Result: CAPM = 13.4%, DDM = 8.15%
CAPM gives 5% + 1.2 × 7% = 13.4%. DDM gives ($2.50 × 1.03) / $50 + 3% = 5.15% + 3% = 8.15%. The difference highlights how method choice impacts the estimate.
Tips & Best Practices
- Use the sensitivity table to build a valuation range rather than a single point estimate.
- Cross-check CAPM with DDM — if they diverge wildly, investigate the assumptions.
- For private companies without beta, use comparable public company betas with leverage adjustment.
- The sustainable growth rate provides a reality check on the dividend growth assumption.
- In practice, many analysts add a size premium (1-3%) for small-cap stocks on top of CAPM.
Method Checks
Compare CAPM, DDM, and bond-yield-plus-premium outputs side by side when the business has uneven growth, dividend policy changes, or a beta that feels unstable.
Assumption Risk
CAPM can swing quickly if beta or the market risk premium is stale. DDM only works when the dividend path is credible, so do not force it onto non-dividend stocks or firms with erratic payouts.
Sources & Methodology
Last updated:
Methodology
This worksheet calculates cost of equity three ways. CAPM uses the user-entered risk-free rate, beta, and market risk premium. The dividend-discount result uses next-period dividend yield plus the entered growth rate. The bond-yield-plus-premium line on this page is a rough proxy because the calculator does not ask for an issuer-specific bond yield; instead it layers a fixed spread assumption and beta-linked premium onto the risk-free rate.
The page is most useful for range-building and cross-checking. If the three methods diverge sharply, that usually means the capital-structure, growth, or market-risk assumptions need another pass rather than that one figure is the single correct answer.
Sources
- Glossary: Beta (Investor.gov) — SEC investor-education glossary entry for beta as a measure of market risk relative to the broad market.
- Glossary: Dividend Yield (Investor.gov) — SEC investor-education glossary entry defining dividend yield.
- Calculating a Company's Cost of Capital (New York University) — NYU corporate-finance reference covering CAPM cost of equity, leverage effects, and WACC inputs.
Frequently Asked Questions
CAPM is most widely used but relies on beta accuracy. DDM is good for stable dividend-paying companies. Using all three and averaging provides the most robust estimate.
Each method captures different aspects of risk and return. CAPM focuses on market risk, DDM on cash flow expectations, and bond yield on credit risk. Divergence is normal.
For large US companies, 8-12% is typical. High-growth tech may be 12-18%, while utilities are often 6-9%.
Cost of equity is the equity component of WACC. WACC = (E/V) × Ke + (D/V) × Kd × (1 − Tax), where Ke is the cost of equity.
DDM cannot be used for non-dividend companies. Rely on CAPM and potentially build-up methods instead.
Very. A 1% change in discount rate can easily shift a DCF valuation by 10-20%. This is why sensitivity analysis is critical.
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