1. What is Cost of Common Stock Equity?

The cost of common stock equity represents the return required by equity investors. It's calculated as the sum of the dividend yield and the expected growth rate of dividends.

2. How Does the Calculator Work?

The calculator uses the cost of equity formula:

Where:

• \( Dividends \) — Expected annual dividends per share
• \( Price \) — Current market price per share
• \( Growth\ Rate \) — Expected growth rate of dividends (as decimal)

Explanation: The formula combines the dividend yield (dividends/price) with the expected growth rate to determine the total required return.

3. Importance of Cost of Equity Calculation

Details: The cost of equity is crucial for capital budgeting decisions, company valuation, and determining the weighted average cost of capital (WACC).

4. Using the Calculator

Tips: Enter dividends and price in the same currency units. Growth rate should be entered as a decimal (e.g., 0.05 for 5%). All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: What's a typical cost of equity range?
A: Most companies have cost of equity between 8-15%, but it varies by industry and company risk.

Q2: How to estimate the growth rate?
A: Growth rate can be estimated from historical dividend growth or analysts' earnings growth projections.

Q3: What if a company doesn't pay dividends?
A: For non-dividend companies, other models like CAPM (Capital Asset Pricing Model) may be more appropriate.

Q4: Does this account for risk?
A: The growth rate component implicitly includes risk as investors demand higher growth for riskier companies.

Q5: How often should cost of equity be recalculated?
A: It should be reassessed regularly as stock prices and growth expectations change over time.