Cost Of Equity Calculator

Background.

Shareholders never send a company an invoice for their capital, but they do charge for it. The charge is the return they expect for holding a risky share instead of a government bond, and if a business cannot offer at least that much, its share price falls until the expected return is high enough again. That required return is the cost of equity. It is the discount rate in a dividend or equity cash-flow valuation and one of the two ingredients of a weighted average cost of capital.

Nobody can observe it directly, so it has to be estimated, and the capital asset pricing model is the standard way. Developed by William Sharpe and others in the 1960s, CAPM says investors are rewarded only for risk they cannot diversify away — the part of a share's movement that follows the market as a whole. Beta measures that part. A share with a beta of 1.2 has tended to move about 1.2% for each 1% move in the market; one with a beta of 0.6, a little over half as much.

Three numbers are needed: a risk-free rate, usually a government bond yield in the currency of the cash flows; the return expected from the market as a whole; and the share's beta. The required return is the risk-free rate plus beta times the gap between the other two.

Small changes in that answer move valuations a lot. In a growing-dividend valuation a share is worth next year's dividend divided by the cost of equity minus the growth rate, so for a company growing at 3% a year, moving the cost of equity from 10% to 11.2% cuts the value by almost 15%.

The page applies single-factor CAPM and nothing else: no premium for company size, country risk, illiquidity or anything specific to the firm. Adding one is a separate judgement, and it is better made visibly.

What is cost of equity calculator?

The cost of equity is the annual rate of return investors require for holding a company's shares, given how risky those shares are. It is an opportunity cost rather than a payment: the return shareholders give up by not putting the money into something else of similar risk. Under CAPM it equals the risk-free rate plus a risk premium proportional to beta, where beta is the covariance of the share's returns with the market's returns divided by the variance of the market's returns. The answer is an annual percentage.

How to use this calculator.

1. 01Enter the risk-free rate as an annual percentage. For valuing a long-lived business, analysts usually take the yield on a long-dated government bond in the currency of the cash flows rather than a short-term bill rate.
2. 02Enter the equity beta. Published betas are usually estimated from several years of returns against a broad index; a beta borrowed from a comparable company reflects that company's borrowing, so it may need relevering to your firm's debt level first.
3. 03Enter the expected market return as a total annual return, not as a premium. If your source quotes an equity risk premium instead, add it to the risk-free rate first: a 5.5% premium on a 4% bond yield means entering 9.5%.
4. 04Read the CAPM cost of equity, then add any size, country or company-specific premium yourself if your method calls for one — none is applied here.

The formula.

Cost of equity = Rf + β × (Rm − Rf). Rf is the risk-free rate, Rm the expected return on the market portfolio, and the bracket is the market risk premium: the extra return investors demand for holding the whole market rather than a riskless bond. β scales that premium to the individual share. A beta of exactly 1 returns the market return itself; above 1 gives more, between 0 and 1 less, and each extra 0.1 of beta adds a tenth of the premium. All three rates are annual percentages. Because the page asks for Rm rather than the premium, it helps to rewrite the formula as Rf × (1 − β) + β × Rm. That form shows something easy to miss: with the market return held fixed, a higher risk-free rate raises the answer only for betas below 1 and lowers it for betas above 1. A negative beta, which the page accepts, produces a cost of equity below the risk-free rate.

A worked example.

Frequently asked questions.

References& sources.

1. [1]OpenStax, Rice University. Principles of Finance, 2022. Chapters 6–10. Retrieved 2026-08-06.
2. [2]U.S. Internal Revenue Service. Tax guidance current 2026. Official forms, instructions and tax topics. Retrieved 2026-08-06.
3. [3]U.S. Securities and Exchange Commission. Investor.gov current 2026. Investment products and risk. Retrieved 2026-08-06.