Calculate the cost of equity using CAPM, Dividend Discount Model, and Bond Yield + Premium method. Includes sensitivity analysis and method comparison.
The cost of equity is the return a company must offer its shareholders to compensate them for the risk of owning its stock. It is a critical input for discounted cash flow (DCF) valuations, weighted average cost of capital (WACC), and corporate finance decisions about capital allocation.
There is no single definitive way to calculate cost of equity — it must be estimated. The three most common approaches are CAPM (Capital Asset Pricing Model), the Dividend Discount Model (Gordon Growth Model), and the Bond Yield plus Risk Premium method. Each has strengths and weaknesses, which is why practitioners often compute all three and triangulate.
This calculator computes cost of equity using all three methods simultaneously, allowing you to compare and cross-check. The sensitivity table shows how the CAPM result changes across different beta and market risk premium assumptions, which is essential for building valuation ranges rather than single-point estimates. Check the example with realistic values before reporting.
Estimating cost of equity is one of the most debated topics in finance. Small changes in assumptions can dramatically shift a company's valuation. This calculator lets you run multiple methods and sensitivity scenarios in seconds, giving you the range of estimates needed for robust financial analysis. Keep these notes focused on your operational context.
CAPM: Ke = Rf + β × (Rm − Rf) DDM (Gordon Growth): Ke = [D₁ / P₀] + g Bond Yield + Premium: Ke = Rf + Credit Spread + Equity Premium Sustainable Growth = ROE × (1 − Payout Ratio)
Result: CAPM = 13.4%, DDM = 8.15%
CAPM gives 5% + 1.2 × 7% = 13.4%. DDM gives ($2.50 × 1.03) / $50 + 3% = 5.15% + 3% = 8.15%. The difference highlights how method choice impacts the estimate.
Use consistent units, verify assumptions, and document conversion standards for repeatable outcomes.
Most mistakes come from mixed standards, rounding too early, or misread labels. Recheck final values before use. ## Practical Notes
Use this for repeatability, keep assumptions explicit. ## Practical Notes
Track units and conversion paths before applying the result. ## Practical Notes
Use this note as a quick practical validation checkpoint. ## Practical Notes
Keep this guidance aligned to expected inputs. ## Practical Notes
Use as a sanity check against edge-case outputs. ## Practical Notes
Capture likely mistakes before publishing this value. ## Practical Notes
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CAPM is most widely used but relies on beta accuracy. DDM is good for stable dividend-paying companies. Using all three and averaging provides the most robust estimate.
Each method captures different aspects of risk and return. CAPM focuses on market risk, DDM on cash flow expectations, and bond yield on credit risk. Divergence is normal.
For large US companies, 8-12% is typical. High-growth tech may be 12-18%, while utilities are often 6-9%.
Cost of equity is the equity component of WACC. WACC = (E/V) × Ke + (D/V) × Kd × (1 − Tax), where Ke is the cost of equity.
DDM cannot be used for non-dividend companies. Rely on CAPM and potentially build-up methods instead.
Very. A 1% change in discount rate can easily shift a DCF valuation by 10-20%. This is why sensitivity analysis is critical.