Cost of Equity Calculator (CAPM)
Calculate cost of equity using the CAPM model.
Enter risk-free rate, beta, and market return to find required return.
Cost of equity is the return that shareholders require for investing in a company. It is a key input in the WACC formula and is most commonly estimated using the Capital Asset Pricing Model (CAPM).
CAPM Formula:
Cost of Equity (Re) = Rf + β × (Rm - Rf)
Where:
- Rf = Risk-free rate (typically the yield on 10-year government bonds)
- β (Beta) = A measure of the stock’s volatility relative to the overall market
- Rm = Expected market return (historical average of a broad market index)
- Rm - Rf = Market risk premium (the extra return investors demand over the risk-free rate)
Understanding Beta:
- β = 1.0 — the stock moves in line with the market
- β > 1.0 — the stock is more volatile than the market (higher risk, higher required return)
- β < 1.0 — the stock is less volatile (lower risk, lower required return)
- β = 0 — no correlation with the market (theoretical)
Reference beta values by industry:
| Industry | Typical Beta |
|---|---|
| Utilities | 0.3 – 0.6 |
| Consumer Staples | 0.5 – 0.8 |
| Healthcare | 0.7 – 1.0 |
| Financials | 0.8 – 1.3 |
| Industrials | 0.9 – 1.2 |
| Technology | 1.0 – 1.5 |
| Biotech / Startups | 1.5 – 2.5 |
Worked Example: Suppose:
- Risk-free rate (Rf) = 4.5% (10-year US Treasury yield)
- Beta (β) = 1.2 (moderately volatile stock)
- Expected market return (Rm) = 10%
Step 1 — Market risk premium: 10% - 4.5% = 5.5% Step 2 — Risk adjustment: 1.2 × 5.5% = 6.6% Step 3 — Cost of equity: 4.5% + 6.6% = 11.1%
This means shareholders expect an 11.1% annual return to compensate for the risk of holding this stock.
Finding the risk-free rate: Use the yield on long-term government bonds that match your analysis currency and time horizon. For USD-denominated analysis, use the 10-year US Treasury yield. For EUR, use the German 10-year Bund yield.
Finding beta: Beta values are published by financial data providers like Yahoo Finance, Bloomberg, Reuters, and Morningstar. Look for “5-year monthly beta” as it is the most common standard.
Limitations of CAPM:
- Assumes markets are efficient and investors are rational.
- Beta is backward-looking and may not predict future volatility.
- The market risk premium varies depending on the time period and market used.
- Does not account for company-specific risks beyond market correlation.
Alternative models:
- Fama-French 3-Factor Model — adds size and value factors
- Dividend Discount Model (DDM) — Re = (D1 / P0) + g
- Build-Up Method — for private companies without a tradeable beta