Cost of equity
Also called: required return on equity
The return shareholders require for owning a company's shares, given the risk, used as the discount rate for equity cash flows.
It starts from a risk-free rate and adds a premium for the extra risk of shares. The capital asset pricing model estimates it as the risk-free rate plus beta times the equity risk premium, but every input is uncertain, so reasonable analysts use different rates.
Learn more in these lessons
- Discount rates and the cost of equityHow do you choose a discount rate for valuing a company's shares?
- Weighted average cost of capital (WACC)What is WACC, and when should you use it to value a company?
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