Valuation
Cost of equity
The return shareholders require for the risk of owning a company’s shares.
How it works
It is not a payment the company makes. It is the hurdle rate: the return below which shareholders would rather own something else.
It is usually estimated with CAPM — the risk-free rate plus beta times the equity risk premium.
Related terms
- Capital asset pricing modelA model saying an asset’s expected return depends on the risk-free rate plus its market risk.
- WACCThe blended cost of a company’s debt and equity funding, weighted by how much of each it uses.
- Equity risk premiumThe extra return investors expect from shares over risk-free government debt, for accepting the risk.
- BetaHow much an investment tends to move when the market moves, with 1.0 meaning it moves in line.
More in Valuation
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.