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Cost of Equity

The return shareholders require to compensate for investment risk.

Cost of equity represents the rate of return investors expect for holding a company's equity, compensating for both the time value of money and the risk premium. It is commonly estimated using the Capital Asset Pricing Model (CAPM), which adds a risk premium (beta times the equity risk premium) to the risk-free rate.

Formula
re=rf+β×(rm−rf)r_e = r_f + \beta \times (r_m - r_f)
Where
rer_e=Cost of equity
rfr_f=Risk-free rate
β\beta=Equity beta
rmr_m=Expected market return
Related Terms

Weighted Average Cost of Capital (WACC)

The blended cost of equity and debt — the hurdle rate for investments.

Gordon Growth Model

Single-stage DDM assuming constant dividend growth in perpetuity.

Market Capitalization

Share price multiplied by shares outstanding — the total equity value.

Enterprise Value (EV)

Market cap plus net debt — the total acquisition value of the business.

P/E Ratio

Share price divided by earnings per share — how much you pay per dollar of profit.

EV/EBITDA

Enterprise value divided by EBITDA — a capital-structure-neutral valuation metric.