Cost of Equity Calculator (CAPM)
Calculate cost of equity using CAPM: Re = Rf + beta × (Rm - Rf).
Enter risk-free rate, beta, and expected market return to find required equity 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
How we build and check this calculator
This calculator runs entirely in your browser, so the numbers you enter stay on your device. The math behind it is written by hand and tested against worked examples and standard references before the page goes live.
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