How to use the cost of equity calculator
- Pick a method: CAPM, dividend growth, or both.
- For CAPM, enter the risk-free rate, the beta and the equity risk premium. These are the example values in the boxes, so replace them with figures you trust.
- For dividend growth, enter the last annual dividend, the current share price and the dividend growth you assume per year.
- Read each result and the gap between them. The check line returns the share price from the dividend result.
Formula
CAPM: cost of equity = risk-free rate + beta x equity risk premium
next dividend D1 = last dividend x (1 + g)
dividend growth: cost of equity = D1 / price + g
check: price = D1 / (cost of equity - g)
The two methods answer the same question from different inputs. CAPM uses market risk, while dividend growth uses the price investors pay for expected dividends.
A stock with both inputs
Take a risk-free rate of 4%, a beta of 1.2 and a premium of 5.5%. CAPM gives 4% + 1.2 x 5.5% = 10.6%. For the dividend method, the last dividend is $2.00, the price is $50 and growth is 4%, so the next dividend is $2.08 and the cost of equity is 2.08 / 50 + 4% = 8.16%.
The average is 9.38% and the methods differ by 2.44 points. Putting 8.16% back into the price formula gives $2.08 / (8.16% - 4%) = $50, which confirms the arithmetic.
Why the two methods disagree
CAPM depends on a beta that is estimated from past price moves and on a premium that nobody can measure exactly. The dividend method depends on a growth rate that must hold forever and on a price that already reflects what the market expects. Small changes in either assumption move the answers by a point or more, so treat each as an estimate and look at the range.
Where it fits
The cost of equity is the return that shareholders require. It feeds into the weighted average cost of capital, which blends it with the cost of debt. See the WACC Calculator and the Dividend Discount Model Calculator for the next steps.
Assumptions and limits
- Every input is a number you supply. No market data is looked up and no rate is built in.
- The dividend method assumes dividends grow at a constant rate forever, which needs the cost of equity to be above that rate.
- CAPM assumes beta and the premium are stable.
- The result is an estimate, not a forecast of returns.
Frequently asked questions
What is beta?
Beta measures how much a stock tends to move compared with the overall market. A beta of 1.2 means it has moved about 20% more than the market on average. You enter it; the page does not look it up.
What is the equity risk premium?
It is the extra return investors expect from holding stocks instead of a risk-free asset. Sources estimate it differently, so the value in the box is only an example to replace.
Why does dividend growth need a growth rate below the cost of equity?
The formula divides by the cost of equity minus the growth rate. If growth were equal to or above the cost, the value would be infinite or negative, which has no meaning.
Which method should I trust?
Neither is exact. Many analysts compute both and look at the range. If the stock pays no dividend or an erratic one, the dividend method is not a good fit.