Cost of Equity (Ke) Calculator

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Cost of Equity is the return required by equity investors for investing in a company, reflecting the risk associated with the investment. More info →

Input

Method

Company Type

Risk-Free Rate (%) Usually Government Bond Yield

Beta (β) Enter a value between -1.00 and 2.00. Beta measures a stock's volatility relative to the overall market.

Market Return (%)

Dividend Per Share

Stock Price

Growth Rate (%)

Company Specific Premium (%)

DLOM (%)

Select calculation method and enter inputs to calculate Cost of Equity.

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How This Calculator Works

Cost of Equity is the yearly return shareholders expect for the risk of owning the company. You can estimate it two ways: from market risk (CAPM) or from the dividends the share pays (DDM). For a private company the calculator can add extra return for being harder to sell and for company-specific risk.

The Formulas

CAPM: Ke = Rf + β × (Rm − Rf)
DDM: Ke = (Dividend ÷ Price) × 100 + g

Private company: Adjusted Ke = Ke × (1 + DLOM) + Company Specific Premium

What Each Input Does

Method: CAPM uses the risk-free rate, beta and market return. DDM uses the dividend, share price and dividend growth.
Risk-Free Rate (%) / Market Return (%): The return on a safe government bond, and the expected return of the overall market. The gap between them is the market risk premium.
Beta (β): How strongly the share moves with the market. Above 1 means more risk, so a higher cost of equity.
Dividend Per Share / Stock Price / Growth Rate (%): Used by DDM: the dividend yield plus how fast the dividend is expected to grow.
Company Type: Public – no adjustment. Private – applies the optional DLOM (Discount for Lack of Marketability) and Company Specific Premium.

Step by Step

The base cost of equity is worked out with the method you chose.
For a private company it is increased by the DLOM percentage, then the company specific premium is added.
The result is shown to 2 decimals.

Reading the Result

Below 8% – relatively low equity risk.

8% to below 15% – moderate equity risk.

15% or more – higher risk and higher return expectations.

Quick Example

CAPM with risk-free rate 4%, beta 1.2 and market return 10%: Ke = 4% + 1.2 × (10% − 4%) = 11.20%, a moderate risk level. As a private company with a 10% DLOM and a 2% premium: 11.20% × 1.10 + 2% = 14.32%.