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


You May Also Like

Related Articles
  1. Each year for nearly half a century, Berkshire Hathaway has provided an annual letter to shareholders that discusses the gains it has produced for holders of its common stock.
    Fundamental Analysis

    Balance Sheet: Analyzing Owners' Equity

  2. Companies finance the purchase of assets either through equity or debt, making a high equity multiplier indicates that a larger portion of asset financing is being done through debt.

    Equity Multiplier

  3. Term

    Long/Short Equity

  4. Mutual Funds & ETFs

    Learn The Lingo Of Private Equity Investing

  5. Options & Futures

    Reverse Engineering Return On Equity

  6. Bonds & Fixed Income

    Equity Valuation In Good Times And Bad

  7. Term

    Gift Of Equity

Trading Center