Cost of Equity
The cost of equity is the required rate of return that equity investors expect for investing in a company’s shares.
Reflects both Time Value of Money and compensation for risk.
Most commonly estimated using CAPM:
Alternatively, can be estimated using the Dividend Discount Model (DDM):
Where:
- = Expected dividend next period
- = Current stock price
- = Expected growth rate of dividends
Used in calculating Weighted Average Cost of Capital for investment and valuation decisions.