Cost Of Equity

What is '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:

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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.

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BREAKING DOWN '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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1. What is the difference between cost of equity and cost of capital?

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