Cost of Equity

Cost of Equity

The return that stockholders require for a company. The traditional formula is the dividend capitalization model:

Notes:

Let's look at a very simple example: let's say you require a rate of return of 10% on an investment in the TSJ Sports Conglomerate. The stock is currently trading at $10 and will pay a dividend of $0.30. Through a combination of dividends and share appreciation you require a $1.00 return on your $10.00 investment. Therefore the stock will have to appreciate by $0.70, which, combined with the $0.30 from dividends, gives your your 10% cost of equity.

The capital asset pricing model (CAPM) is another approach to determining cost of equity.

See also: CAPM, Cost of Capital, Equity, Hurdle Rate, Required Rate of Return, WACC

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Cost of equity

The required rate of return for an investment of 100% equity.