How do you calculate cost of equity?



• Cost of equity is calculated using capital asset pricing model which states that the cost of equity of any company is the risk-free rate + Beta multiplied by the equity market premium.


• Risk free rate is the rate an investor receives for investing in risk free investments such as government bonds in the investor’s country.


• Beta attempts to capture the risk of investing in an individual stock versus the equity index. It is calculated by comparing the volatility of the individual stock versus that of equity index


• The Equity market premium is the additional rate an equity investor should earn over and above the risk-free rate for investing in a stock index.



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