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:
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.

Return On Equity  ROE
The amount of net income returned as a percentage of shareholders ... 
Cost Of Capital
The required return necessary to make a capital budgeting project, ... 
Optimal Capital Structure
The best debttoequity ratio for a firm that maximizes its value. ... 
Cost Of Debt
The effective rate that a company pays on its current debt. This ... 
Capital Structure
A mix of a company's longterm debt, specific shortterm debt, ... 
Required Rate Of Return  RRR
The minimum annual percentage earned by an investment that will ...

What is the difference between residual income and operational income?
Residual income is usually calculated in the context of personal finances, as opposed to operating income, which is calculated ... Read Full Answer >> 
Why might two companies calculate capital employed differently?
The primary reason there are different ways of calculating a company's capital employed is because there are different definitions ... Read Full Answer >> 
What is the difference between the cost of capital and the discount rate?
The cost of capital refers to the actual cost of financing business activity through either debt or equity capital. The discount ... Read Full Answer >> 
Why does zerobased budgeting require ongoing evaluation and management?
Zerobased budgeting must have ongoing evaluation and management due to the fact a zerobased budget requires management ... Read Full Answer >> 
How does the market share of a few companies affect the HerfindahlHirschman Index ...
In economics and commercial law, the HerfindahlHirschman Index (HHI) is a widely used measure that indicates the amount ... Read Full Answer >> 
What does the rule of 70 indicate about a country's future economic growth?
The rule of 70 could be used to indicate the approximate number of years that it would take a company's economic growth to ... Read Full Answer >>

Fundamental Analysis
Discounted Cash Flow Analysis
Find out how analysts determine the fair value of a company with this stepbystep tutorial and learn how to evaluate an investment's attractiveness for yourself. 
Investing Basics
Capital Budgeting
Learn the process through which businesses determine whether projects are worth pursuing. 
Markets
Digging Into The Dividend Discount Model
The DDM is one of the most foundational of financial theories, but it's only as good as its assumptions. 
Fundamental Analysis
Taking Shots At CAPM
Find out why many investors think the capital asset pricing model is full of holes. 
Economics
How Return On Equity Can Help You Find Profitable Stocks
It pays to invest in companies that generate profits more efficiently than their rivals. This is where ROE comes in. 
Investing Basics
DCF Valuation: The Stock Market Sanity Check
Calculate whether the market is paying too much for a particular stock. 
Personal Finance
An Introduction To Capital Budgeting
We look at three widely used valuation methods and figure out how companies justify spending. 
Bonds & Fixed Income
Investors Need A Good WACC
Weighted average cost of capital may be hard to calculate, but it's a solid way to measure investment quality. 
Fundamental Analysis
Taking Stock Of Discounted Cash Flow
Learn how and why investors are using cash flowbased analysis to make judgments about company performance. 
Bonds & Fixed Income
Equity Valuation In Good Times And Bad
Learn how to filter out the noise of the market place in order to find a solid way of determing a company's value.