Cost Of Equity

Dictionary Says

Definition of 'Cost Of Equity'


In financial theory, the return that stockholders require for a company. The traditional formula for cost of equity (COE) is the dividend capitalization model:
 




Cost Of Equity
A firm's cost of equity represents the compensation that the market demands in exchange for owning the asset and bearing the risk of ownership.

Investopedia Says

Investopedia explains 'Cost Of Equity'


Let's look at a very simple example: let's say you require a rate of return of 10% on an investment in TSJ Sports. The stock is currently trading at $10 and will pay a dividend of $0.30. Through a combination of dividends and share appreciation you require a $1.00 return on your $10.00 investment. Therefore the stock will have to appreciate by $0.70, which, combined with the $0.30 from dividends, gives you your 10% cost of equity.

The capital asset pricing model (CAPM) is another method used to determine cost of equity.

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