Free cost of equity and cost of debt calculator using CAPM. Calculate required return on equity with risk-free rate, beta, and market premium. Building block for WACC.
Cost of capital is the minimum return a company must earn to satisfy its investors. It consists of two parts: cost of equity (what shareholders expect) and cost of debt (what lenders charge, after tax).
The Capital Asset Pricing Model (CAPM) calculates cost of equity: Ke = Risk-Free Rate + Beta × Equity Risk Premium. The higher the beta (market sensitivity), the higher the required return.
This calculator computes both Ke and Kd, compares them, and provides the inputs needed for a WACC calculation. Understanding these rates is essential for sound capital budgeting because any project that earns less than the cost of capital destroys value rather than creating it. The cost of equity reflects what shareholders expect in return for their risk, while the cost of debt reflects the after-tax interest expense on borrowings. Together, they combine into the weighted average cost of capital, which serves as the discount rate for evaluating investments, acquisitions, and internal projects.
Every investment decision depends on the cost of capital. It's the hurdle rate: projects earning more than the cost of capital create value; projects earning less destroy it. Without knowing your cost of capital, you can't do DCF analysis, evaluate projects, or optimize capital structure. It is the foundational input for virtually every corporate finance decision.
Cost of Equity (Ke) = Rf + β × (Rm − Rf) Cost of Debt (Kd) = Interest Rate × (1 − Tax Rate) Equity Risk Premium (ERP) = Rm − Rf Where Rf = risk-free rate, β = beta, Rm = expected market return
Result: Cost of Equity: 11.1% | After-tax Cost of Debt: 4.5%
Ke = 4.5% + 1.2 × 5.5% = 11.1%. Kd (after-tax) = 6% × (1 − 0.25) = 4.5%. Equity costs more than debt because equity holders bear more risk and have no guaranteed payments.
For companies without a public beta, the Build-up Method adds risk premiums: Ke = Rf + ERP + Size Premium + Company-Specific Premium. This is common for valuing small private businesses in litigation, estate planning, and M&A.
For companies in emerging markets, add a country risk premium (CRP) to CAPM: Ke = Rf + β × ERP + CRP. Country risk premiums range from 1% (developed) to 10%+ (frontier markets). Use sovereign bond spreads or Damodaran's country risk data.
Interest is tax-deductible, creating a "tax shield" worth Interest × Tax Rate annually. This is why the after-tax cost of debt is lower than the stated interest rate, and why moderate leverage can actually reduce WACC and increase firm value (Modigliani-Miller with taxes).
Beta measures how much a stock's price moves relative to the overall market. Beta of 1.0 = same as market. Beta of 1.5 = 50% more volatile (if market drops 10%, stock drops ~15%). Beta of 0.7 = 30% less volatile. You can find betas on Yahoo Finance, Bloomberg, or similar services.
The historical US ERP is approximately 5-6% (stocks returned ~10%, bonds ~4%). However, forward-looking estimates vary from 4-7%. Professor Aswath Damodaran publishes updated ERP estimates annually. Use a consistent source for comparability.
Equity holders are last in line during bankruptcy — they bear the most risk. Debt holders have legal claims to interest and principal. Additionally, interest payments are tax-deductible, further reducing the effective cost of debt. This risk/priority difference is why equity always costs more.
Yes, but since private companies don't have a traded beta, you use "unlevered betas" from comparable public companies, then re-lever for your company's capital structure. Also add a size premium (2-6%) and potentially an illiquidity premium (1-3%).
For large US companies: cost of equity 8-12%, after-tax cost of debt 3-5%, WACC 7-10%. For smaller/riskier companies: WACC 12-20%. Startups may have implied costs of capital of 25-50%+ reflecting extreme risk.
WACC blends the cost of equity and cost of debt, weighted by their proportions in the capital structure. WACC = (E/V) × Ke + (D/V) × Kd × (1 − T). This calculator provides Ke and Kd; plug them into our WACC calculator for the complete picture.