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.
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.

Cost Of Debt
The effective rate that a company pays on its current debt. This ... 
Weighted Average Cost Of Capital ...
Weighted average cost of capital (WACC) is a calculation of a ... 
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 Budgeting
The process in which a business determines whether projects such ...

Stock Analysis
Analyzing Intel's Return on Equity (ROE) (INTC)
Learn about Intel's historical return on equity and how it stacks up against peers. This is an important metric for investors to understand. 
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.

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 finance?
"Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >> 
What is the difference between positive and normative economics?
Positive economics is objective and fact based, while normative economics is subjective and value based. Positive economic ... Read Full Answer >> 
How do you calculate working capital?
Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >> 
Do you discount working capital in net present value (NPV)?
Net present value (NPV) calculations should include the discounted value of changes in working capital. This treatment of ... Read Full Answer >> 
How is working capital different from fixed capital?
There are several key differences between working capital and fixed capital. Most importantly, these two forms of capital ... Read Full Answer >>