Cost of Equity
Cost of equity is the return required by equity investors given the risk of owning a company's shares — the opportunity cost of investing elsewhere.
Concept map
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Definition
Cost of equity is the return required by equity investors given the risk of owning a company's shares — the opportunity cost of investing elsewhere.
Use case
Used in corporate finance workflows, analysis, and technical interviews.
Judgment check
Useful only when the assumptions and inputs behind the metric are understood.
Deep dive
How to think about Cost of Equity
Typically estimated using CAPM: Cost of Equity = Risk-Free Rate + Beta × Equity Risk Premium. It represents the minimum return management must achieve on equity-financed projects to satisfy shareholders. Higher-beta (riskier) companies have higher costs of equity.
Example: Risk-free rate = 3%, Market risk premium = 5%, Company beta = 1.3. Cost of equity = 3% + 1.3 × 5% = 9.5%. Projects must exceed 9.5% return to create shareholder value. For comparison, a utility with beta 0.7 has cost of equity = 3% + 0.7 × 5% = 6.5%.