Cost of equity.
In plain English
Cost of equity is the return investors require to hold a company's stock rather than something safer. Unlike interest on debt, nobody sends a bill for it, so it has to be estimated. The most common approach starts with a risk-free rate, adds a market risk premium, and scales that premium by how much the stock moves with the market. The result feeds discount rates, hurdle rates, and valuation models. Different estimation methods produce different answers for the same company, so it is a considered estimate rather than a fact.
01Why it matters
It sets the bar a company has to clear before growth actually creates value for shareholders rather than just making the business bigger.
02The math, step by step
Suppose the risk-free rate is 4 percent, the market risk premium is 5 percent, and a stock moves 1.2 times as much as the market. 4 percent plus 1.2 times 5 percent gives an estimated cost of equity of 10 percent. These are teaching figures, not current market inputs.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Dividend yield is the cash a company actually pays divided by the share price. Cost of equity is the total return shareholders require, dividends and price appreciation together. A company that pays no dividend still has a cost of equity.
04Receipts
Every figure on this page is sourced to a primary document. Tap to open the original.
Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice