




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


 