The Cost of equity, denoted by RE, refers to the financial return a company is expected to provide to its shareholders in exchange for their investment. This expected return covers the risk shareholders accept by investing their funds in the company. The cost of equity can be calculated using the Capital Asset Pricing Model (CAPM), as demonstrated in the subsequent formula:Here, the Risk-Free Rate (Rf) represents the return on a risk-free investment, the Market Return (Rm) represents the total return from the stock market, and Beta (β) measures the stock's volatility in relation to the overall market. Higher beta means higher risk and, therefore, higher expected return.
Learn Cost of Equity with interactive examples and practice exercises in our Valuation module.
This interactive learning module helps you understand Cost of Equity through hands-on practice and real-world examples.