Cost of Equity Calculator

Our cost of equity calculator measures the profits a company needs to pay its investors. These profits are given against the investments of the shareholders or against their equity in a business. 

The cost of equity or the profitability may vary according to the risk a market may present to the investments.

What is Cost of Equity?

The cost of the equity is the rate of return a company wants to pay to investors, according to the certain prevailing business situation. The ROI calculator can be used to find the expected return on investment, according to the equity amount.

How to Find Cost of Equity?

We can find the cost of the equity by the two methods and these two methods are primary tools for finding the cost of the equity:

• The Dividend Capitalization Model(DCM)
• The Capital Asset Pricing Model(CAPM)

The Dividend Capitalization Model(DCM):

The  Dividend Capitalization Model calculates the cost of the equity by the dividend per share(DPS) divided by the Current Market Value(CMV) of the stock. We add the Growth Rate of the Dividend to the answer.  

The cost of common equity formula  for the CPM is:

Re = (D1 / P0) + g

Where:

Re=Cost of the Equity

D1=Dividend share the next year

P0=Current share price g=Dividend growth rate 

Dividend share the next year:

Companies usually announce the dividend in advance of the distribution. The dividend price can be altered annually or quarterly. Some economists do also rely on the past year's share values to assess the future dividend. 

Current Share Price:

The share price can be found against the name of the company on the internet and also from the stock market information. The share prices can alter with the changing business environment. 

Dividend Growth Rate:

The Dividend Growth rate can be measured by the analysis of the company's past years' dividends and by taking the average value of all the past years.It is the rate of profitability a company can offer during the current year.

Practical example:

Consider XYZ Co. Currently has a current market share of $10 and just announced a dividend of $0.85 per share, and it is paid the next year. The growth rate of the dividend is 4%. What is the cost of equity calculation?

The cost of equity capital formula used by the cost of equity calculator:

Re = (D1 / P0) + g

Re = (0.85 /10) + 4%

Re =12.5%

The Capital Asset Pricing Model(CAPM):

The Capital Asset Pricing Model(CAPM) measures and quantifies a relationship between the systematic risk, and expanded Return on Investment. The cost of equity using CAPM calculator can be measured against any kind of risk and ROI. The CAPM formula is widely used in finance for pricing the risky securities and the expected rate of return. 

The Capital Asset Pricing Model(CAPM) 

Ra=Rrf+[Ba*(Rm-Rrf)]

Where

Ra = Expected return on a security

Rrf = Risk-free rate

Ba = Beta of the security

Rm = Expected return of the market

Practical Example:

Consider a company is offering the Risk-free rate (Rrf) of 2% and the Expected return of market (Rm) 3%. The beta of the security(Ba) is 4.Then find the Expected return on a security (Ra)?

Sol:

Expected Rate of Return Expected Return Ra = Rf + Bi * (Rm - Rf)

= 2 + 4 * (3 − 2)

= 2 + (4 * 1)

Ra= 2 + 4 = 6%

How does the Dost of Equity Calculator Work?

The equity growth calculator work by providing the following values:

Input:

• Enter the dividend per share 
• Current values of the shares
• The growth rate of the Dividend

Output:

The cost of equity calculator measures:

• Cost of the equity 

References:

From the source of forbes.com: What is the Cost of Equity?Capital Asset Pricing

From the source of the corporatefinanceinstitute.com:Cost of Equity, How to Calculate Cost of Equity