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. ... 
Capital Asset Pricing Model  CAPM
A model that describes the relationship between risk and expected ... 
Capital Budgeting
The process in which a business determines whether projects such ... 
Weighted Average Cost Of Capital ...
A calculation of a firm's cost of capital in which each category ...

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 >> 
What is the difference between calledup share capital and paidup share capital?
The difference between calledup share capital and paidup share capital is investors have already paid in full for paidup ... Read Full Answer >> 
What is the utility function and how is it calculated?
In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >> 
How does additional paid in capital affect retained earnings?
Both additional paidin capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >> 
What types of capital are not considered share capital?
The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >> 
What is the difference between issued share capital and subscribed share capital?
The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... 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.