1. What is 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. It's a crucial component in determining a company's cost of capital and valuation.

2. How Does the Calculator Work?

The calculator uses the Dividend Growth Model formula:

Where:

• \( Dividends \) — Annual dividends per share (in dollars)
• \( Price \) — Current stock price (in dollars)
• \( Growth Rate \) — Expected dividend growth rate (as percentage)

Explanation: The formula combines the dividend yield (dividends/price) with the expected growth rate of those dividends.

3. Importance of Cost of Equity

Details: Cost of equity is essential for capital budgeting decisions, company valuation, and determining the optimal capital structure. It helps investors assess whether a stock is appropriately priced given its risk.

4. Using the Calculator

Tips: Enter the annual dividends per share, current stock price, and expected dividend growth rate. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What if a company doesn't pay dividends?
A: For non-dividend paying companies, alternative models like CAPM (Capital Asset Pricing Model) are typically used.

Q2: How do I estimate the growth rate?
A: You can use historical dividend growth rates, analyst estimates, or the company's sustainable growth rate (ROE × retention ratio).

Q3: What are typical cost of equity values?
A: Most companies have costs of equity between 8-15%, with higher-risk companies having higher costs.

Q4: Does this work for preferred stock?
A: For preferred stock, the cost is simply the dividend yield (dividends/price) since preferred dividends typically don't grow.

Q5: What are the limitations of this model?
A: It assumes constant dividend growth and is only applicable to dividend-paying companies. It may underestimate cost for high-growth companies.