Cost Of Equity

AAA

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 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.

RELATED TERMS
  1. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders ...
  2. Cost Of Capital

    The required return necessary to make a capital budgeting project, ...
  3. Optimal Capital Structure

    The best debt-to-equity ratio for a firm that maximizes its value. ...
  4. Capital Budgeting

    The process in which a business determines whether projects such ...
  5. Capital Asset Pricing Model - CAPM

    A model that describes the relationship between risk and expected ...
  6. Weighted Average Cost Of Capital ...

    A calculation of a firm's cost of capital in which each category ...
Related Articles
  1. Digging Into The Dividend Discount Model
    Markets

    Digging Into The Dividend Discount Model

  2. Taking Shots At CAPM
    Fundamental Analysis

    Taking Shots At CAPM

  3. How Return On Equity Can Help You Find ...
    Economics

    How Return On Equity Can Help You Find ...

  4. Capital Budgeting
    Investing Basics

    Capital Budgeting

comments powered by Disqus
Hot Definitions
  1. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
  2. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
  5. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
  6. Budget Deficit

    A status of financial health in which expenditures exceed revenue. The term "budget deficit" is most commonly used to refer ...
Trading Center