Updated on November 06, 2023Table of Contents
Cost of Equity = Risk-Free Rate of Return + Beta * Market Risk Premium
Assuming a risk-free rate of return of 2%, a beta of 1.2, and a market risk premium of 4%, the cost of equity for a company would be:
Cost of Equity = 2% + 1.2 * 4% = 8%
Therefore, the cost of equity for this company is 8%.
Calculating the cost of equity is an important process in financial analysis. By considering the risk-free rate of return, beta, and market risk premium, investors can estimate the cost of equity for a company.
What do you mean by cost of equity?
Cost of equity is the return that a company must offer to its shareholders to compensate them for the risk of investing in the company.
What is the cost of equity in WACC?
In the Weighted Average Cost of Capital (WACC), cost of equity represents the cost of financing through equity, which is combined with the cost of debt to calculate a company’s overall cost of capital.
Why is it called cost of equity?
It is called the cost of equity because it reflects the cost incurred by a company to raise funds through equity, represented by the returns expected by shareholders.
What is the levered cost of equity?
Levered cost of equity accounts for a company’s debt in its capital structure and reflects the increased risk and return required by equity investors due to leverage.
How is the cost of equity relevant in India?
In India, the cost of equity is calculated using local risk-free rates (e.g., government bond yields), market risk premiums, and the beta of the stock specific to the Indian market.
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