




The cost of equity is the minimum rate of return that a business or organization must offer investors or owners to offset their wait for a return on investment and for assuming some level of risk. There are conflicting approaches on estimating the cost of equity and cost of equity percentages. The traditional formula for calculating the cost of equity is the dividend capitalization model (dividend per share/price per share + growth rate of dividends). With the dividend capitalization model, the cost of equity can be calculated for a given industry based on the current rate of return. A higher cost of equity usually signifies a higher risk industry that commands a higher return for the increased risk. Cost of equity can also be determined by the capital asset pricing model (CAPM). Calculating the cost of equity using CAPM is often more difficult then using the dividend capitalization model for determining the cost of equity. The cost of equity does not show up on a company's income statement, however, the cost of equity is never free.
Rate this cost of equity definition...




Where is the market headed? The answer may surprise you. Find out with the exclusive & Barron's recommended charts of Chart of the Day. 

Popular Terms: liquidity ratio, annual return, whollyowned subsidiary, debt service coverage, margin rate, 1031 exchange, covered put, inflation, EBITDA, irrevocable trust, deferred tax, open position, 1035 exchange, exdividend date, stock split, labor relations, cancelled check, required rate of return, stock market close, limit order, real GDP, APR, in escrow, quality assurance, FTSE, LIBOR, per diem, FICO score, current ratio, Zero Cost Collar, average price per share, class C shares, deferred revenue, VIX, retained earnings, implied volatility, exdividend, dividends payable, option premium, balance sheet, command economy, minority interest, Key Rate Duration, diluted share, phantom income, risk management, 144a, reverse mortgage, 401a


 