This Cost of Equity Excel Calculator can be a useful tool for prospective investors. The cost of equity is the required rate of return by shareholders to invest capital into a company. This rate of return is determined based on the degree of risk the investors will take on when investing in the business. The cost of equity is a financial metric companies use to measure how attractive an investment is compared to other opportunities. The cost of equity can be calculated using the Capital Asset Pricing Model (CAPM) or Dividend Capitalization Model (if the company pays dividends to its shareholders).
- CAPM: This approach looks at the riskiness of an investment relative to the market. The formula to calculate cost of equity is as follows: E(Ri) = Rf + βi x [E(Rm) - Rf] Where: E(Ri) = Expected return on asset i (Cost of Equity) Rf = Risk-free rate of return βi = Beta of asset i E(Rm) = Expected market return
- Dividend Capitalization Model: This approach applies to companies that pay dividends to its shareholders, and assumes that dividends will grow at a constant rate. The formula for calculating cost of equity is: Re = (D1 / P0) + g Where: Re = Cost of Equity D1 = Dividends/share next year P0 = Current share price g = Dividend growth rate