Cost of Equity



Next video:
Loading the player...

The cost of equity is the rate of return an investor requires from a stock before exploring other opportunities.

Companies have to reward shareholders for the risk that other investments will pay a higher return.  Typically, the cost of equity is higher when the overall stock market is strong, or when the company is seen as volatile.

The rate of return that investors seek may come from two possible sources. In some cases, they receive dividends, which provide an immediate reward for their ownership. Or the stock could experience appreciation, enabling them to profit when they sell shares.

 

Cost of Equity = [Dividend Payout ÷ Share Price] + Rate of Appreciation

 

Related Articles
  1. Professionals

    Cost Of Equity

    Determining an accurate cost of equity for a firm is integral in order to be able to calculate the firm's cost of capital.
  2. Fundamental Analysis

    Calculating the Equity Risk Premium

    Equity risk premium is the excess expected return of a stock, or the stock market as a whole, over the risk-free rate.
  3. Investing Basics

    How to Calculate Required Rate of Return

    Investors use the required rate of return to decide where to put their money, and corporations use it to decide if they should pursue a new project.
  4. Professionals

    Equity = Stock

    The term equity is synonymous with the term stock. Throughout your preparation for this exam, and on the exam itself, you will find many terms that are used interchangeably. Equity or stock creates ...
  5. Investing Basics

    Top Income Investing Strategies for 2016

    Dividend paying stocks and equity income funds are two ways to get yield out of your investments this year.
  6. Fundamental Analysis

    The Equity-Risk Premium: More Risk For Higher Returns

    Learn how the expected extra return on stocks is measured and why academic studies usually estimate a low premium.
  7. Forex Education

    How to Calculate Required Rate of Return

    The required rate of return is used by investors and corporations to evaluate investments. Find out how to calculate it.
  8. Professionals

    Factors Affecting the Cost of Capital

    CFA Level 1 - Factors Affecting the Cost of Capital. Learn about the various factors affecting the cost of capital. Discusses both the controllable and uncontrollable influences facing a company.
  9. Investing Basics

    What Investors Should Know About Interest Rates

    Understanding interest rates helps you answer the fundamental question of where to put your money.
  10. Investing Basics

    High Yield Stocks Can Hurt Your Retirement Nest Egg

    High yield stocks can give you a handsome return, but for retirement investors the risk far outweighs the reward.

You May Also Like

Hot Definitions
  1. Goodwill

    An account that can be found in the assets portion of a company's balance sheet. Goodwill can often arise when one company ...
  2. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  3. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  4. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  5. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  6. 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 ...
Trading Center