Definition – What is the Cost of Equity?
The cost of equity represents the compensation the market demands in owning the stock.
Formula – How to calculate Cost of Equity
Cost of Equity = Growth Rate of Dividends + (Dividends per Share / Current Market Value of the Stock)
A company has dividends per share of $1.50, current market value of $20 per share, and a dividend growth rate of 2.75%.
Cost of Equity = 2.75% + (($1.5 / $20) x 100%) = 2.75% +(0.075 x 100%) = 2.75% + 7.5% = 10.25%
Therefore, this company has a cost of equity of 10.25%.
Sources and more resources
- Wikipedia – Cost of Equity & Cost of Capital – A pair of explanations of cost of equity and how it is calculated.
- Accounting Tools – Cost of equity formula – An overview of the formula to find cost of equity.
- XplainD – Cost of Equity – Some examples for calculating cost of equity.
- Investopedia – Cost of Equity – What cost of equity is and how it can be calculated.