Case 1
- Stock beta (β)
- 1.2
- Risk-free rate
- 4%
- Expected market return
- 10%
11.20%
Open with these valuesCost of Equity Calculator
11.20%
Result: 11.20 %CAPM prices one thing: market risk. Start at the risk-free rate, add the premium the market is expected to pay over it, and scale that premium by the share's beta. A beta of 1.2 with a 4 % risk-free rate and a 10 % market return gives 4 + 1.2 × 6 = 11.2 %.
The numbers at a glance
Held fixed: Stock beta (β) 1.20, Risk-free rate 4.00 %.
| Expected market return (%) | Result (%) |
|---|---|
| 2.50 | 2.20 |
| 5.00 | 5.20 |
| 7.50 | 8.20 |
| 10.00Your value | 11.20 |
| 12.50 | 14.20 |
| 15.00 | 17.20 |
| 17.50 | 20.20 |
| 20.00 | 23.20 |
Worked examples
Case 2
- Stock beta (β)
- 0.6
- Risk-free rate
- 4%
- Expected market return
- 10%
7.60%
Open with these valuesCase 3
- Stock beta (β)
- 2
- Risk-free rate
- 3%
- Expected market return
- 9%
15.00%
Open with these valuesHow it's calculated
Re = Rf + β × (Rm − Rf)
- StepEnter the share's beta; most finance portals publish one.
- StepAdd the risk-free rate — usually a long government bond yield.
- StepAdd the return you expect from the broad market, in percent.
- ResultRead the required return on equity.
What this number means
CAPM is a model fed by estimates
Beta is a published measure of past co-movement and the expected market return is a forecast, so neither input is an observed fact. Historical and implied estimates of the premium often land around 4 to 6 percentage points, which is a range and not a number.
It prices market risk and nothing else
The formula starts at the risk-free rate and adds only the market premium, scaled by beta. Anything specific to the single company sits outside the model.
Only know the premium, not the market return?
Add the premium to the risk-free rate and enter that sum as the expected market return. The calculator subtracts the risk-free rate again internally, so the answer is the same either way.
Commonly misread
A 6-point premium goes straight into the market return field.
Add the risk-free rate to it first. With a 4 % risk-free rate and a 6-point premium, enter 10.
A negative beta must be a typing error.
Beta may be negative, and a share that moves against the market has one. At beta −0.5 with 4 and 10 the cost of equity is 1.00.
This is the company's cost of capital.
It is the return shareholders require, one input to WACC. WACC blends it with the after-tax cost of debt, weighted by how much of each the company uses.
Reference table
| Beta, risk-free rate, market return | Equity risk premium | Cost of equity |
|---|---|---|
| 0, 4, 10 | 6 | 4.00 |
| -0.5, 4, 10 | 6 | 1.00 |
| 1, 4, 10 | 6 | 10.00 |
| 1.2, 4, 10 | 6 | 11.20 |
| 1.5, 4, 10 | 6 | 13.00 |
| 2, 3, 9 | 6 | 15.00 |
| 1.33, 3.5, 9.2 | 5.7 | 11.08 |
| 1, 5, 4 | -1 | 4.00 |
Questions
How do I calculate the cost of equity?
Use the CAPM formula: cost of equity = risk-free rate + beta × (market return − risk-free rate). With a 4 % risk-free rate, a beta of 1.2 and a 10 % expected market return, that is 4 + 1.2 × 6 = 11.2 %. The middle term, market return minus risk-free rate, is the equity risk premium.
What is beta?
Beta measures how much a share moves relative to the market as a whole. A beta of 1 moves in line with the market, above 1 is more volatile and below 1 is less; a negative beta moves against it. In CAPM beta scales the equity risk premium, so a higher beta means more market risk and a higher required return.
What is the equity risk premium?
It is the extra return the market is expected to deliver over a risk-free asset — market return minus risk-free rate. Historical and implied estimates often land around 4 to 6 percentage points. It is the building block that CAPM scales by beta to get one share's own risk premium.
What if I only know the premium, not the market return?
Add the premium to the risk-free rate and enter that sum as the expected market return. With a 4 % risk-free rate and a 6-point premium, enter 10. The calculator subtracts the risk-free rate again internally, so you get the same answer either way.
Which risk-free rate should I use?
The yield on a long-dated government bond that matches your horizon, commonly a ten-year Treasury or a ten-year Bund. These are treated as effectively default-free, so they set the floor every riskier investment must beat. Match the maturity to the cash flows you are valuing.
How does the cost of equity relate to WACC?
The cost of equity is the return shareholders require, while the weighted average cost of capital blends it with the after-tax cost of debt, weighted by how much of each the company uses. The cost of equity is therefore one input to WACC, and usually the larger of the two, because shareholders bear more risk than lenders.
Sources and last check
Information, not financial advice.