Cost of Equity Calculator - CAPM Required Return

Cost of equity is the return shareholders require for holding a company’s residual risk. It is not a cash coupon the firm pays each year. It is an opportunity cost used to discount equity cash flows, to set a hurdle for buybacks versus new projects, and to build WACC when combined with after-tax debt cost. The cost of equity calculator uses the capital asset pricing model, the workhorse one-factor model in corporate finance. CAPM says required return equals the risk-free rate plus beta times the market risk premium. Higher systematic risk, measured by beta, demands a higher expected return. The formula is Re = rf + β × MRP. Enter rf and the market premium as percents: 4 and 5 with beta 1.2 produce 4 + 1.2 × 5 = 10%. The page displays that 10.00% as the cost of equity. Beta of 1 means the stock moves with the market; beta above 1 amplifies market moves; beta below 1 dampens them. The risk-free input is usually a long-term government yield in the same currency as the cash flows you will discount. The market risk premium is the extra return investors expect from a broad equity index over that risk-free rate. Neither input is observed with certainty, which is why two careful analysts can differ on Re even when they share the same algebra. Valuation teams use cost of equity in dividend-discount and levered-cash-flow models. CFOs use it when they say a project must “return more than equity holders could get elsewhere at this risk.” Students use it to check CAPM homework. It is the wrong rate for discounting unlevered free cash flow to the firm; that job belongs to WACC. It is also the wrong rate for a private project that cannot be modeled with a listed comparable beta. In those cases, practitioners start with an industry beta, unlever and relever it, and sometimes add size or country premia that this worksheet does not include. Beta is the fragile input. A five-year weekly beta from one data vendor will not match a two-year daily beta from another. Financial leverage raises equity beta, so a recapitalized firm needs a new beta rather than last year’s figure. The risk-free rate should match the cash-flow horizon; using a three-month bill to discount a ten-year project mismatches duration. Market premia of 4% to 6% are common in developed markets, but a 8% premium will push Re up quickly. The cost of equity calculator will faithfully multiply whatever you type, including an implausible 20% premium. Do not confuse cost of equity with dividend yield or with accounting ROE. A firm that pays no dividend still has a cost of equity. ROE is an accounting outcome, not the required return. CAPM assumes investors hold diversified portfolios and care about beta, not total volatility. Idiosyncratic risk is ignored. For a concentrated owner of a private company, required return may be higher than CAPM. Use the cost of equity calculator to make the CAPM arithmetic explicit, then document rf, beta source, and premium. Recalculate when yields or leverage change, and compare a low-beta and high-beta case before you lock a discount rate into a model.