1. What is the Cost of Equity?

The cost of equity represents the return a company must offer investors to compensate for the risk of investing in its stock. The Capital Asset Pricing Model (CAPM) is the most widely used method to estimate this cost.

2. How Does the CAPM Calculator Work?

The calculator uses the CAPM equation:

Where:

• \( R_f \) — Risk-free rate (typically 10-year government bond yield)
• \( \beta \) — Beta coefficient (measure of stock volatility relative to market)
• \( R_m \) — Expected market return
• \( R_m - R_f \) — Market risk premium

Explanation: The equation calculates the minimum return investors require, considering both the time value of money (risk-free rate) and the risk premium for investing in stocks.

3. Importance of Cost of Equity Calculation

Details: The cost of equity is crucial for determining a company's weighted average cost of capital (WACC), evaluating investment projects, and making financial decisions.

4. Using the Calculator

Tips: Enter the risk-free rate as a percentage (e.g., 2.5 for 2.5%), beta coefficient (typically between 0.5-2.0), and expected market return as a percentage. All values must be non-negative.

5. Frequently Asked Questions (FAQ)

Q1: What's a typical risk-free rate?
A: Usually the yield on 10-year government bonds (e.g., 2-4% for US Treasuries, depending on economic conditions).

Q2: How do I find my company's beta?
A: Beta is available from financial databases like Bloomberg, Yahoo Finance, or your stock broker's research tools.

Q3: What market return should I use?
A: Historical average market returns are typically 7-10% annually, but forward-looking estimates may differ.

Q4: Are there limitations to CAPM?
A: Yes, CAPM assumes perfect markets and that beta fully captures risk. Alternative models like Fama-French may be more comprehensive.

Q5: How often should cost of equity be recalculated?
A: Regularly, especially when market conditions change significantly or when making major financial decisions.