Cost of Equity Calculator
Turn a risk-free rate, a beta, and an expected market return into the return shareholders require.
CAPM in one step
Re = risk-free rate + beta × (market return − risk-free rate).
Inputs are estimates
Beta and the expected market return are forecasts, so the result is a reasoned estimate, not a guarantee.
What is the cost of equity?
The return shareholders require
The cost of equity is the return investors expect for putting their money into a company's shares rather than a safe alternative. It is the equity side of a firm's cost of capital, and it feeds directly into discounted-cash-flow valuations and the weighted average cost of capital (WACC). The most widely taught way to estimate it is the Capital Asset Pricing Model (CAPM), introduced by William Sharpe, which links the required return to a single measure of market risk: beta.
CAPM says the required return equals the risk-free rate plus a premium that scales with the stock's sensitivity to the market.
Re = Rf + β × (Rm − Rf)Here Rf is the risk-free rate, β (beta) is how much the stock moves relative to the market, and Rm is the expected market return. The term Rm − Rf is the equity risk premium — the extra return the market is expected to deliver over a safe asset. Multiplying it by beta gives the stock's own risk premium, and adding the risk-free rate gives the total return shareholders should demand. As Investopedia describes, a beta of 1 earns exactly the market premium, while higher betas earn more and lower betas earn less. According to investor-education material from FINRA, the return investors demand rises with the risk they take on — exactly the relationship beta captures in this formula.
Suppose a stock has a beta of 1.2, the 10-year government bond yields 4.0%, and you expect the broad market to return 10.0%.
Find the equity risk premium
Market return minus risk-free rate: 10.0% − 4.0% = 6.0 percentage points.Scale it by beta
1.2 × 6.0 = 7.2 percentage points — the stock's own risk premium.Add the risk-free rate
4.0% + 7.2% = 11.2%.Read the result
Shareholders should require about 11.2% a year to hold this stock.
Each input has a standard source, and small changes move the answer, so it pays to choose them carefully.
Risk-free rate
The yield on a long-dated government bond, such as the 10-year Treasury or Bund, matched to your time horizon.
Beta
A stock's sensitivity to the market, published by finance portals and data providers; many use a five-year monthly beta.
Market return
The return you expect from a broad index. Historical equity premiums compiled by sources such as NYU's Aswath Damodaran cluster around 4–6 points over the risk-free rate.
Because the risk-free rate tracks government bond yields, which move with the Federal Reserve's policy stance, it shifts over time — and research shows the equity risk premium itself has varied across decades rather than staying fixed. If you already know the equity risk premium rather than the full market return, simply add it to the risk-free rate to get the market return this calculator expects. The two routes give the same answer because CAPM only ever uses the difference between them.
The cost of equity is an annual percentage: the minimum return a rational shareholder should demand given the stock's market risk. A higher figure means the market sees more risk and therefore wants more reward, which also means future cash flows are discounted more heavily and the implied value is lower. Analysts use the number as the discount rate in a dividend-discount or free-cash-flow model, and as the equity input to WACC alongside the after-tax cost of debt. Pair it with our future value calculator to see what that required return compounds to over time, or the tax-equivalent yield calculator when you are weighing equities against tax-advantaged bonds. Because beta and the expected market return are forward-looking estimates, treat the output as a reasoned central estimate and test a range of betas and premiums rather than trusting a single point. The CFA Institute curriculum stresses exactly this kind of sensitivity analysis when applying CAPM in practice.
The arithmetic is exact; the inputs are forecasts.
An estimate, not investment advice
CAPM is a model, and its inputs — especially beta and the expected market return — are estimates that change over time and differ by source. Real-world returns deviate from any single-factor model, and alternatives such as the dividend growth model or multi-factor models can give different figures. This calculator is an educational tool for informational and planning purposes only, and is not legal or tax advice. Consult a qualified financial advisor before making investment or valuation decisions, and always test how sensitive your result is to the assumptions you feed in.