Cost of Equity (Ke) Calculator
Based on the Capital Asset Pricing Model (CAPM)
%
Typically the 10-year Treasury yield.
%
Historical average return of the index (e.g. S&P 500).
Please enter valid numerical values for all fields.
Required Rate of Return (Ke)
0.00%
Calculation Breakdown:
Risk Premium: 0.00%
Baseline Rate: 0.00%
Risk Premium: 0.00%
Baseline Rate: 0.00%
Equity Rate Calculator: Understanding Cost of Equity
This Equity Rate Calculator determines the Cost of Equity (Ke) using the standard Capital Asset Pricing Model (CAPM). Unlike loan calculators that focus on debt service, this tool focuses on the required rate of return that equity investors demand based on the risk profile of an asset or company.
What is the Cost of Equity?
The Cost of Equity is the theoretical rate of return an investment must generate to be attractive to shareholders. If a company cannot generate a return greater than this rate, the stock price may decline as investors move their capital to better opportunities.
It represents the opportunity cost of investing in one specific equity over another with a similar risk profile.
The CAPM Formula
The calculator uses the Capital Asset Pricing Model formula, which mathematically links risk and expected return:
Ke = Rf + β × (Rm – Rf)
Where:
- Ke: Cost of Equity (The result).
- Rf (Risk-Free Rate): The return of a theoretical zero-risk investment, typically government treasury bonds (e.g., 3% to 4%).
- β (Beta): A measure of a stock's volatility in relation to the overall market.
- Beta = 1.0: Moves exactly with the market.
- Beta > 1.0: More volatile/risky than the market.
- Beta < 1.0: Less volatile/safer than the market.
- Rm (Expected Market Return): The average historical return of the stock market (typically 8% to 10%).
- (Rm – Rf): This is known as the Market Risk Premium.
Example Calculation
Imagine you are valuing a tech startup. The current 10-year Treasury bond yields 3.5% (Risk-Free Rate). The company is highly volatile with a Beta of 1.5. You expect the general market to return 10% annually.
| Component | Value |
|---|---|
| Risk-Free Rate (Rf) | 3.5% |
| Beta (β) | 1.5 |
| Market Return (Rm) | 10.0% |
| Equity Rate (Ke) | 13.25% |
Calculation: 3.5 + 1.5 * (10 – 3.5) = 13.25%
Why is this important?
For corporate finance professionals and investors, the Equity Rate is used to discount future cash flows to their present value. A higher Beta (higher risk) results in a higher Cost of Equity, which lowers the present value of the company, reflecting the "discount" investors demand for taking on extra risk.